Bailout Merger No. 1: PNC and National City

Treasury cash will help Pittsburgh bank gobble up weaker competitor.

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The big question about the $250 billion that the treasury plans to inject into banks is just what those institutions will do with the funds.

Hank Paulson has been urging the industry to lend it out—rather than simply hoard it to protect against future losses. But the treasury secretary certainly hasn't been discouraging healthy banks from using it to gobble up weaker players.

From the Washington Post:

Treasury Secretary Henry M. Paulson Jr. confirmed yesterday that some banks may use the capital they receive through the Treasury program to buy weaker banks and that this could benefit the financial system.

In an appearance on "Charlie Rose," Paulson said acquisitions were "not the driver behind this program. The driver is to have our...healthy banks be well-capitalized so they can play the role they need to play for our country right now." He added, "There will be some situations where it's best for the economy and for the banking system for there to be a consolidation."

(Watch that interview here)

Today, PNC Financial Services Group became the first industry player to unveil an acquisition concurrent with an announcement that it will receive funds from the Troubled Asset Relief Program. The Pittsburgh bank revealed plans to scoop up struggling regional bank National City for about $5 billion in stock. At the same time, it said it would sell $7.7 billion of equity to the treasury.

"We are also gratified that we have been selected to participate in Treasury's Capital Purchase Program, which has helped to put this transaction on a very solid footing," James E. Rohr, chairman and chief executive officer of PNC, said in a statement.

So do deals like this represent an effective use of TARP funds?

Scott Talbot, senior vice president of government affairs for the Financial Services Roundtable, says such acquisitions put the banking system in a better position to make loans. "The use of this money as a part of an acquisition results in a stronger bank better able to fulfill the primary mission of the TARP—to lend," Talbot says.

But Ed Yardeni, chief investment strategist at Yardeni Research, says it isn't quite so simple. Yardeni says it beats the alternative of having federal regulators take over a failed bank, but:

"It is probably not going to do much for lending anytime soon. Whenever you have a consolidation [it's] fairly distracting and requires quite a bit of effort to put the two organizations together. And the strong bank buying the weak bank is going to have to come up with some capital to shore up the entity that it is buying. So the unfortunate thing is that much of this TARP injection of capital is really just going to fill a black hole in the banking system for losses that have already been incurred, and that is not going to increase the lending power of these banks. It means they aren't forced to cut back on lending ... but it doesn't give you more lending."