NEW YORK A number of financial institutions, including Capital One Financial Corp. and SunTrust Banks Inc., have announced they will receive funds under the Treasury Department's rescue program to strengthen their capital position.
But what started as an effort by the federal government to spur lending has transfigured, some analysts contend, to a much more grandiose undertaking that will essentially weed out the weak banks from the strong. Critics argue that such a focus puts too much power in the hands of the government in determining which banks survive the credit crisis.
As part of its $700 billion financial rescue package passed in September, the government announced plans earlier this month to pour $125 billion through stock purchases into nine large financial companies: JPMorgan Chase & Co., Bank of America Corp. (including Merrill Lynch & Co.), Citigroup Inc., Wells Fargo & Co., Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp. Another $125 billion is now being made available to other banks.
Several of the banks that have received preliminary approval from the Treasury for investments have said they plan to use some of the money for acquisitions, including SunTrust and Regions Financial Corp., both of which expect to receive about $3.5 billion apiece. Even smaller institutions, like Seattle-based Washington Federal Inc., which announced a $200 million commitment from the government, plan to deploy some of the money for dealmaking.
While the overarching goal of the investments is to bolster banks' balance sheets so they will begin more normal lending, the Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks.
By doling out money to only the strongest financial institutions, with the aim of spurring consolidation among banks, the government is protecting itself from having to salvage some of the industry's weakest players, analysts said.
"It appears to us that these 'gifted' banks will receive the capital whether they need it or not, as they will likely do the cleanup on behalf of the Fed and the Treasury by acquiring weaker institutions," wrote Morgan Keegan & Co. analyst Robert Patten in a research note late Friday.
In what was the first instance of a bank using its investment from the government to make an acquisition, Pittsburgh-based PNC Financial Services Group Inc. said Friday it plans to acquire National City Corp. for $5.58 billion. PNC said it had received $7.7 billion in cash through selling stock to the government under the program. Meanwhile, National City has said it had reason to believe that it would not be able to fully participate in the government's bailout program.
Fox-Pitt Kelton analyst Andrew Marquardt believes a distressed sale became the Cleveland-based bank's only option.
"Our understanding is that a key reason for National City to sell in the same week that it reported third-quarter results was that National City management became aware that it was highly unlikely to be able to participate in the TARP capital purchase program," Marquardt wrote in a note to clients.
Assistant Treasury Secretary David Nason said Monday that the administration's major aim is to stabilize the financial system and that stronger institutions will be in a better position to make loans and support the overall economy.
The emphasis on acquisitions makes sense, said Jason O'Donnell, senior research analyst at Boenning & Scattergood, but there are also significant ramifications.
"While on the whole it's positive in terms of its implications for improving capital, improving lending," O'Donnell said, "it is likely to have the unintended consequence of separating the winners and losers, which is normally a process that the free market is engaged in."