If You Give A Bank a Cookie

So is all that bailout money being put to good use? One possible answer just showed up on the BBC NEWS Web site:

A US bank has become the first to use some of the $700bn (£440bn) government bail-out to buy a rival.

PNC Financial Services Group is buying National City for $5.6bn - making PNC the US's fifth largest bank by deposits with the fourth most branches.

Cleveland-based National City needed to be rescued after being heavily weighed down by bad mortgage debt.

As part of the bail-out, the US Treasury aims to buy stakes in banks in return for capital.

And while recipients can use some of the investment for acquisitions, the aim of the controversial $700bn move was also to free up lending.

Has this done anything for the frozen credit market, or is it just providing an incentive for banks to play with new money in new ways? Consider this item by Lauren Tara LaCapra from TheStreet.com:

Regulators have decided not to release the name of banks that have been approved to receive capital from the government, but to allow companies to report individually, according to a source familiar with the situation.

The Treasury Department was first prepared to release a list of nearly two dozen banks who will receive funds from its $250 billion authorization to inject capital into the financial sector as early as 11 a.m. on Friday. However, it reversed course to avoid "creating winners and losers in the market," according to the source.

The announcement would have been a positive sign for those who make the list, because their financial state is strong enough to qualify for the program, the source says. On the other hand, those not included may have been seen as weak, and could have faced negative sentiment from customers, counterparties and investors.

That was evidenced by the deal PNC (PNC Quote - Cramer on PNC - Stock Picks) reported on Friday to acquire National City (NCC Quote - Cramer on NCC - Stock Picks) for $5.58 billion, while receiving $7.7 billion in federal funds in exchange for preferred equity. The government rejected Nat City's proposal to receive funds, forcing it into the hands of PNC, The Wall Street Journal reported Friday.

Indeed, another post to TheStreet.com, this time by Laurie Kulikowski argues that this sort of the thing is the beginning of a trend:

"I expect more consolidation," says Roger Cominsky, a partner in Hiscock & Barclay's financial institutions and lending practice area. "The Treasury is using the $250 billion to prop up the capital of the surviving banks. Those banks are going to be under immense pressure to acquire the sick, but not dead banks."

Additionally, the Federal Deposit Insurance Corp. "has a vested interest in seeing more consolidation because that lessens the risk of the insurance fund," Cominsky adds. "So you will probably see more consolidation over the next few weeks or months."

Hopefully, the current generation of kids are familiar with Laura Joffe Numeroff's book, If You Give A Mouse a Cookie, which, in its own cute little way, explores the unintended consequences of giving out of kindness. I suppose this book is not easily available at bookstores in the District of Columbia. If it were, then Treasury Secretary Henry Paulson (not to mention both Houses of Congress) would not have required much cognitive skill to recognize that the book is about more than cute mice and cookies.

Meanwhile, the question remains as to whether this whole recovery plan is for American citizens in dire straits or for shareholders heavily invested in the financial sector. Those curious in the academic exercise can take a look at the chart for PNC over the course of this year. It is not exactly rosy; but it is also not as bone-chilling as the charts the media prefer to show us. All things considered, PNC looks like a happy little mouse; but it may yet get fat and lazy from eating too many cookies!