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Bank Eat Bank: Bailout Encourages Mergers

As the Treasury doled out the last amount of TARP’s first tranche of $350 billion, it became apparent that banks did not use the money for mortgage relief. Contrary to what the Treasury told Congress, the banks large enough to be eligible to receive Treasury assistant were not contractually obligated to spend the money to refinance mortgages for those borrowers now underwater with falling property values. Instead, large banks used the money for merger and acquisition activity in the purchase of smaller banks.

The four largest recipients of TARP money: Wells Fargo, Chase, Bank of America, and Citibank received $25 billion each. Subsequently, the following major acquisitions took place: Wells Fargo Bank purchased Wachovia Bank; Chase Bank purchased Washington Mutual & Bear Stearns; Bank of America purchased Merrill Lynch.

Banks did not benefit solely from the taxpayer funds received from TARP. The Treasury rewrote tax rules allowing the purchasing bank to declare losses incurred by the recently acquired bank on their own tax filings. This rule change, which Congress did not approve, allowed those banks to obtain considerable tax savings at the public’s expense. In the case of Wells Fargo’s acquisition of Wachovia Bank, the $15 billion purchase may allow the bank to get $19 billion in tax savings for a net profit of $4 billion. However, the M&E activity does not appear to be limited to buying smaller banks in distress. PNC Bank used $25 billion in TARP funds to buy much larger National Bank, the seventh largest bank in the US.

The Treasury denied National Bank access to TARP funds in what appears to have been a heavy-handed effort by the government to ensure their purchase by PNC. What also became apparent is that the US Treasury was able to operate independent of any oversight.

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