- The Washington Times - Tuesday, October 28, 2008

The Treasury Department has placed more than $34 billion in 18 regional banks in a renewed push to ease the nation’s credit crisis, amid growing complaints that the recipients of the taxpayer bailout are using the money not to lend to customers but to buy their competitors.

The Treasury move is the second under a $250 billion program to buy preferred shares in leading banks to bolster their balance sheets and encourage new loans. Nine of the country’s biggest financial firms received $125 billion earlier this month, and officials are now suggesting that insurance companies and other financial firms could also be helped.

Among those participating in the latest round include Pittsburgh-based PNC Financial Corp., the nation’s eighth-largest bank, and McLean’s Capital One Financial Corp., an industry leader in credit cards and consumer loans.

But smaller banks, lawmakers on Capitol Hill and a number of private analysts complain that the Treasury Department program, which is voluntary, is too vague about what banks can do with the money.

“The government could have driven a harder bargain if they wanted to get a better return on the taxpayers’ money,” said Desmond Lachman, a resident fellow at the American Enterprise Institute (AEI) and former managing director at Salomon Smith Barney. “There could have been strings attached, and I don’t think there were.”

Camden Fine, chief executive officer of the Independent Community Bankers of America, a trade group of the country’s 5,000 small community banks, said in an interview his members were lukewarm at best about the Bush administration’s $700 billion Wall Street rescue in the first place.

“When they hear some of this money may be used by some giant bank to buy them or, worse, buy their competitor down the street, that is not going down well with my members, believe me,” he said.

Several of the banks that have agreed to participate in the program have said explicitly that at least some of the money will be used to buy up rivals, including JP Morgan and City National Bank of Beverly Hills, Calif. PNC, which will sell $7.7 billion in preferred stock to the Treasury program, announced Friday it was acquiring Cleveland-based City National Bank for $5.6 billion.

Valley National Bancorp, a Wayne, N.J., bank which applied to sell $330 million of senior preferred stock to the government, said it intends to use the money in part to “grow lending operations and support acquisitions of other financial institutions which may become available in the current economic downturn.”

Treasury officials lack leverage to dictate how their bailout money will be used because the first two waves of banks that are participating have relatively healthy balance sheets. Treasury Secretary Henry M. Paulson Jr. had to lobby forcefully to get a number of banks to agree to “voluntarily” participate, analysts said.

But Assistant Treasury Secretary Neel Kashkari, the department’s point man for the rescue effort, faced sharp questioning last week at a Senate Banking, Housing and Urban Affairs Committee hearing about what the banks were doing with the government’s money.

“It is beyond troubling … that those lenders who are receiving billions of dollars from U.S. taxpayers are considering using those dollars not to make loans but rather to pursue some acquisition opportunities and to create a capital cushion where they will comfortably sit while the American consumer and small business person struggle,” said committee Chairman Christopher J. Dodd, Connecticut Democrat.

Alabama Sen. Richard C. Shelby, the panel’s ranking Republican, asked, “Why did Treasury not attach a requirement to increase lending as a price for receiving the government money?”

Mr. Kashkari, echoing Mr. Paulson, said the program is designed to give healthy banks an incentive to lend and not “hoard” the taxpayer money.

But, Mr. Kashkari added, “We also didn’t want to be in a position of micromanaging our banks.”

Some analysts say the British bank bailout plan pushed by Prime Minister Gordon Brown - and widely copied in Washington and other European capitals - contains more conditions on the banks that accept government money to boost their lending.

“We expect to be rewarded for the support we provide,” Mr. Brown said. But some British banking analysts say Mr. Brown’s government is finding it equally hard to force private lenders to make loans they don’t want to make.

Mr. Fine of the community bankers trade group said it was probably “inevitable” that some of the bailout money would be used by banks for acquisitions.

“But it certainly did not serve anyone’s PR effort when people started talking about it so openly,” he said.