Big banks using bailout money to buy small banks

The Treasury Department has allocated more than $150 billion of the financial bailout plan to about 30 banks. But instead of making loans, "It appears that the $700 billion will be used for Wall Street banks to take over small banks, in small towns. Like the one I live in," writes columnist Don McNay of Richmond, Ky.

"Unlike other countries, such as England, the United States did not require that banks taking government bailout money lend it out! " McNay exclaims. "If I was a running a bank, my primary “encouragement” is to make money for my shareholders. If I can take government money and use it for something more profitable, I am going to do it. Like any businessperson would. The most profitable thing banks can do is take government money and buy up another bank." (Read more)

The story was broken by McNay's friend, Joe Nocera of The New York Times, after listening to a conference call held by JPMorgan Chase, seemingly the only financial giant still standing tall: "The dirty little secret of the banking industry is that it has no intention of using the money to make new loans." The Wall Street Journal reports on other banks that are taking federal money.

Paul Kiel of ProPublica says one major exception is Ohio-based Huntington Bancshares. However, he writes, "The evidence suggests many of those banks will use the cash to buy up weaker banks. That’s not how the program was sold. Banks were going to use the money to lend, Treasury Secretary Hank Paulson announced earlier this month. . . . But the banks, both privately and publicly, aren’t talking about helping the economy. They’re talking about helping themselves. . . . The weaker banks will use the money to plug their holes, while the stronger banks have the option of using the money to fund takeovers of weaker banks or simply holding on to the money as a cushion in tough times." (Read more)

What is ProPublica? Its Web site calls it "an independent, non-profit newsroom that produces investigative journalism in the public interest. We strive to foster change through exposing exploitation of the weak by the strong and the failures of those with power to vindicate the trust placed in them."

UPDATES, Oct. 28: ProPublica lists the banks getting federal money. The Los Angeles Times reports Treasury policy is dividing regional banks into haves and have-nots. "Banks that fail to get federal money by Nov. 14, when officials plan to finish investing $250 billion in financial institutions, may find that their best option is to be taken over by a bank that receives Treasury funding," Scott Reckard writes. (Read more)