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Step One: Nationalize, Step Two: Consolidate

Published 10/21/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

The Treasury Department has already organized the largest financial nationalization in world history with its $700 billion bailout package. It now hopes to lead the consolidation of America's banks, encouraging large national and regional banks to merge with one another or acquire smaller competition, according to The New York Times.

This move is meant to bring stability, but in a market driven by competition more options tend to result in better quality. Gigantic companies already have enough trouble trying to understand and empathize with the plight of most citizens. Now they are being encouraged to not only get bigger, but to absorb others perceived to be “weak.”

The Treasury Department declared preferences for the nine major banks that are to receive a total of $125 in government funding. Other regional banks like KeyCorp, Fifth Third and Bancorp have also been preferred by the Treasury. The Treasury will now work in concert with these large banks to find suitable acquisition and merger operations.

Hopefully, the bailout will succeed and the financial system will stabilize. Banks will start lending to one another and the market will return to its peak of a year ago. Unfortunately, this hope is a bit unlikely. Treasury secretary Henry Paulson has strongly encouraged all recipients of federal funding to take steps to help embattled homeowners, but there is still no comprehensive plan to address the most pressing factor facing the economy today: the still declining housing market.

Finally, since the bailout is not being funded with fiscal measures like increased taxation, tariffs or spending cuts, all of the money necessary to fund the government's capital infusion is being borrowed from foreign investors by the Treasury. This means that in the end any profits reaped by the Treasury will be sent overseas to foreign holders of Treasury bonds not to the American people, as many proponents have argued. The government's continued mismanagement of the economy has completely undermined our capacity to remain stable and competitive. The bailout is just another addition to an already long list.

Source The New York Times:

In a step that could accelerate a shakeout of the nation’s banks, the Treasury Department hopes to spur a new round of mergers by steering some of the money in its $250 billion rescue package to banks that are willing to buy weaker rivals, according to government officials.

...

With bankers traumatized by the credit crisis and the loss of investor confidence, officials said, there are plenty of banks open to selling themselves. The hurdle is a lack of well-capitalized buyers.

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Providing capital to help facilitate a merger, officials say, is also a way to track how the capital is used. Some analysts have questioned how much control the government can exert over its investment, when it is injected into banks in return for nonvoting preferred shares.

...

While the Treasury’s offer of capital is attractive, analysts cautioned that cash alone might not be enough to reshape the industry. Recent deals, they note, have featured distressed banks sold at fire-sale prices.

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