This Bloomberg article treats as a news item the fact that the Treasury is focusing its equity infusion efforts on strong banks, leaving the rest to find their own exit strategy.
But this approach is not surprise; in fact, it is exactly what Treasury said it would do in a conference call to analysts exactly a month ago.
In theory, this might not be a bad idea. The banking industry needs to be rationalized, since excessive leverage permitted the entire industry to grow well beyond sustainable levels. In 1980, financial firms accounted for 8% of S&P 500 earnings. At the industry’s peak, they were 46% of S&P earnings.
However, the way the Treasury is going about this assures that big firms will become even larger. That is not a plus for systemic stability. The only thing worse than firms to big to fail is firms too big to rescue.
The U.S. government’s $160 billion handout to banks from Niagara Falls to Beverly Hills is going mostly to lenders that need it least, putting weaker rivals at risk of being shut down or taken over, analysts say.
“This has the unintended effect of making the strong stronger and the weak weaker,” said Gray Medlin, founder of Carson Medlin Co., a Raleigh, North Carolina, investment bank focused on banking deals. “Banks that are getting bad exams and are under intense pressure from regulators won’t be successful in applying.”
The government buying spree has so far targeted two dozen regional lenders. One, PNC Financial Services Group Inc., immediately bought a competitor, National City Corp. Another, Saigon National Bank, had almost four times the minimum level of capital before selling a $1.2 million stake.
Treasury Secretary Henry Paulson is doling out cash to recapitalize lenders and jump-start takeovers. Besides PNC and Saigon National, regional lenders that have accepted government stakes in exchange for cash include SunTrust Banks Inc., Capital One Financial Corp. and KeyCorp. They also include City National Corp., in Beverly Hills, and First Niagara Financial Group Inc., in upstate New York.
“The goal with this over time is to drive consolidation,” said Ron Farnsworth, chief financial officer of Umpqua Holdings Corp. in Portland, Oregon, which expects to sell a $246 million stake to the government…
“Those struggling the most probably aren’t going to participate,” said Karen Dorway, president of BauerFinancial, a Coral Gables, Florida-based research firm that studies the financial health of banks. She included as examples Downey Financial Corp., BankUnited Financial Corp. and Vineyard National Bancorp….
The government isn’t forthcoming on explaining the purchase program because of concern it may spark bank runs, said Randy Dennis, president of DD&F Consulting, a Little Rock, Arkansas,firm that advises banks. “Banks that are left out will have to deal with the PR effect of not being included,” he said.