October 23, 2008

Rescue fund likely to induce bank takeovers

In determining which banks will receive part of the $250 billion rescue plan, the Treasury announced it will "look very favorably" on healthy institutions making an acquisition. Although the plan is supposed to bolster better lending practices, the money will probably foster consolidation, with some banks already reporting they intend to use the funds for acquisitions, according to the Wall Street Journal.

Those acquisitions will prove to be controversial, however, as Treasury Secretary Henry Paulson has repeatedly said the government's funding is intended to be used to restore confidence in the banking sector, allowing the banks to go back to better lending practices and encouraging investors.

"Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, that capital," Paulson said on Monday. Taxpayers would essentially be "footing the bill" the Journal says. Acquisitions within the banking industry would be less of a boost to the economy than would better loan practices.

The Treasury will use certain criteria to determine which banks will receive funding. Senior officials tell the Journal the Treasury will make investment decisions based on factors such as a bank's health and management and whether a bank is involved in or contemplating a merger transaction, though it doesn't want its money to be used directly for that purpose.

The Treasury will not make public the names of banks that are rejected, and government officials are debating whether banks will be required to notify shareholders of their rejection. The SEC declined to comment on this issue.

According to the Journal, many bank executives haven't decided whether they will apply for assistance. Those that don't participate either don't need more capital or are wary of government restrictions in areas such as dividend payments.
Banks have until Nov. 14 to submit an application to their primary regulators.

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