Treasury Hopes Bailout Will Spur Bank Mergers

Paulson seeks to reshape banking with new capital
By Jason Farago,  Newser Staff
Posted Oct 21, 2008 9:23 AM CDT
A Wachovia customer uses an ATM near the company's headquarters in Charlotte, N.C., Monday, Sept. 29, 2008.   (AP Photo/Chuck Burton)
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(Newser) – Treasury's $250 billion cash infusion into financial institutions is meant to increase liquidity and get banks to start lending to each other again, but it might have another effect: accelerating mergers. The New York Times reports that the government's unprecedented recapitalization is also meant to give bigger banks the wherewithal to gobble up smaller, more troubled ones. "Treasury doesn’t want to prop up weak banks," one source said. “One purpose of this plan is to drive consolidation.”

A pair of senior Treasury officials tells the Times that banks using funds to finance acquisitions would receive preference in recapitalization. Having already injected cash into big national banks, the government is targeting so-called "super-regional banks" based in smaller cities. But the Wall Street Journal says Treasury-financed buyouts could prove controversial, with taxpayers footing the bill as big banks pick off their competitors.