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Should bailout money be used by banks to buy out other banks?
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An interesting story in the New York Times this week described how many banks that have received federal bailout funds are not planning to start making loans with the money right away. Instead, many plan to use the cash to shore up their capital ratios, and some may use it to buy up other banks.
At first blush, this seems outrageous. After all, wasn't the bailout designed to open the lending flow to consumers and small businesses starving for credit right now?
But hold on a minute, said a friend of mine who's a Tampa Bay area commercial lender. "A bank buying another bank that's loaded down with distressed assets can help consumers," he told me. "It may be a bit of a delayed impact, but it still will help."
His scenario runs like this: A strong bank buys a weaker bank, gobbling up quality deposits to help its capital base while writing off the troubled assets of the bank being acquired. The result is a stronger bank in much better position to make more loans.
"This would help bring about a clearing out of the banks who made the worst lending decisions the past few years," he said. "A bad business should fail, and that is not a bad thing."
As for the delayed impact, this is one of many reasons why we may not see a lot of positive impact from the bailout for months. And don't forget that increasing the flow of lending dollars is hardly the only factor in fueling a real estate turnaround.
The housing meltdown has coincided with a dramatic drop in consumer confidence. Until gas prices come down some more, until the rash of foreclosures slows, and until the outlook improves for the economy and the stock market, it will be hard for many folks to get comfortable in taking the plunge to buy a home.
