The Bailout's "Pacman Effect"

In response to carping by Barney Frank, Chuck Schumer, and a host of others about banks who receive capital infusions from the US Treasury and then use the capital for purposes other than lending (such as the acquisition of other banks), the Chief Investment Officer of a very large bank, who requests anonymity, made the following brief comments today:

[B]anks acquired since the IRS tax law change and the TARP passage (i.e., Wachovia, Sovereign Bancorp and National City) were severely impaired, and very large.  Their collective deposits totaled $600 billion, 32 times the deposit base of IndyMac, an institution which is already putting pressure on the under-funded FDIC Insurance Fund; I wonder what Schumer and Frank think the alternatives were.  When healthy banks buy weak ones and maintain the acquired bank's pace of lending instead of the FDIC shrinking it after a seizure, that's a positive by-product of consolidation.

Well, that "positive aspect of the by-product of consolidation" depends on what the "pace of lending" was prior to the acquisition. If it wasn't robust, then keeping up an anemic pace isn't all that positive. In addition, critics are skeptical that the acquirers will "keep up the pace." Time will tell.

That said, it should come as no surprise that (A) some banks plan to use additional capital (including any they pick up from the Treasury) to pick off targets of opportunity, or (B) that second-guessers are going to gripe about it. After all, the bailout was originally sold as an emergency measure to buy toxic mortgage-backed securities from banks in order to unfreeze the financial system. It has since morphed into a capital injection engine running on all cylinders and, it appears, a massive subprime borrower bailout with a soupçon of social engineering thrown in for flavor.

I wonder how the acid kickback of that "crap sandwich" tastes to John Boehner now? Even more "craptacular" than at first swallow?