Which banks live or die? Wielding $250 billion, U.S. may decide
Those fortified by federal money could swallow up smaller rivals, leading to fewer, bigger institutions. Some say, however, that the capital-infusion program could help weaker banks stay in business.
By flooding the U.S. banking system with hundreds of billions of dollars in cheap capital, the government could find itself funding the most dramatic change in the nation's financial landscape since the deregulation drive of the 1980s.
That's because the Treasury secretary and bank regulators will decide which banks get an infusion of government money, and which will be denied. Many of the nation's 8,400 banks -- especially the smaller and weaker among them -- may be allowed to fail or be swallowed by bigger rivals, industry analysts say.
"It will hasten consolidation, no doubt about it," said Frederick Cannon, chief equity strategist at investment bank Keefe, Bruyette & Woods Inc.
The stock market reflected that fact Tuesday, he said, noting that investors bid up the shares of banks more likely to be helped by the government, while shares of capital-starved institutions considered unlikely to get government funds declined.
The program is also likely to hasten the evolution of the country's financial system from a conglomeration of community banks into a network of bigger, interconnected institutions, said Timothy J. Yeager, a former economist for the Federal Reserve Bank of St. Louis and a finance professor at the University of Arkansas.
But not everyone agrees. Gerard S. Cassidy, managing director of bank equity research at RBC Capital Markets, said he believed the program would help some weaker banks stay in business, because they will be eligible for the same favorable terms the big banks will get for government capital.
"This plan by the Treasury blurs the lines between the haves and have-nots," Cassidy said. "The natural course of Darwinian banking has been interrupted by this plan."
The program's centerpiece is an infusion of $250 billion into the banking system through the government's purchase of nonvoting preferred shares in financial institutions.
As outlined Tuesday by Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairwoman Sheila C. Bair, the banks will be required to pay dividends of 5% a year on the shares -- an attractively low rate for new capital -- rising to 9% after five years. The rate jump is designed to provide an incentive for banks to repay the taxpayers before the five-year mark.
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