US banks get go-ahead to acquire rivals with government money

US BANKS have been given the green light to use some of the $250 billion being injected by the US government to acquire rival firms. About half the money is being allocated to nine major US banks - including Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup and JPMorgan - with the remainder being distributed among other lenders.

US treasury secretary Hank Paulson said "there will be some situations where it's best for the economy and for the banking system for there to be a consolidation", citing the planned acquisition of Wachovia by Wells Fargo as a "very good thing for the system". This message was spelt out in more blunt terms by government officials. "Treasury doesn't want to prop up weak banks," the New York Times quoted one anonymous official as saying. "One purpose of this plan is to drive consolidation."

Consolidation had been widely expected, but government approval of using funds in such a manner means that an even bigger wave of mergers and acquisitions is now predicted.

JPMorgan chief executive Jamie Dimon recently said that it would be willing to use the government money "for anything that made sense for JPMorgan shareholders", a line that was repeated by numerous companies over the last few days.

MT, the regional bank in which AIB has a 24 per cent shareholding, said yesterday that the environment for mergers was "right" and that they were "ready" to make acquisitions.

Mr Paulson was careful to add that acquisitions were "not the driver behind this programme". The main aim was "increased lending" which would "benefit the US economy and the American people", adding that he wanted and expected banks to "deploy" rather than "hoard" money received. Nevertheless, with US economic data pointing to increased softening, and with the housing market still in obvious distress, many analysts speculate that banks will not be in any rush to lend.

Merrill Lynch chief executive John Thain admitted this week that any government money received was going to be a "cushion" for "at least . . . the next quarter". JPMorgan, which has not been nearly as damaged by subprime write-downs as some of its rivals, has said that it will lend the money, but Mr Dimon added that "if you are a bank that is filling a hole, you obviously can't do that". Some analysts have speculated that as many as seven of the nine players being allocated the aforementioned $125 billion are in such a position.

Using government money to swallow up rival firms rather than to ease lending criteria might be a hard sell on Main Street.

Nor is everyone in the financial community enamoured with the "big is better" approach, with Nobel Prize-winning economist Joseph Stiglitz this week warning of the dangers of creating banks that are "too big to fail".