Paulson Pushes For More Bank Mergers By Tapping $250 Billion Bailout Package

October 21, 2008 7:11 a.m. EST

Washington, D.C. (AHN) - Aside from bringing back stability to the banking industry, the $250 billion bailout package for financially ailing U.S. banks may also reshape the sector as the Treasury Department encourages more bank mergers by tapping the rescue fund.

According to Treasury Secretary Henry Paulson, in a news conference, the department has received indications of interest from banks of various sizes to tap into the remaining $125 billion leftover after the nine largest banks have borrowed half of the amount.

Paulson did not touch the issue of bank mergers in the media event, but the New York Times quotes Treasury officials that within the department, the Federal Reserve and the Federal Deposit Insurance Corp., the issue has been discussed.

Making available the capital to push through with bank mergers is a good way to monitor how the bailout fund will be used. In addition, it will also create stronger firms, which will redound to the banking industry, said Gerard Cassidy, banking analyst of RBC Capital Markets.

Paulson stressed that while the Treasury would rely on the Federal Reserve, FDIC, the comptroller of the currency and Office of Thrift Supervision for advice, the final decision to whom to lend the funds will be with Treasury.

One criterion is will use is that banks must, in turn, relend the money to troubled consumers. "We expect all participating banks to continue to strengthen their efforts to help struggling homeowners... Foreclosure not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole," Paulson said.

One consequence of the Treasury providing the $250 billion bailout fund, which is less than one-fourth of the total bank capital in the U.S., is that in the future the federal government will find it difficult to turn down proposals to buy shares in other industries which are also in deep debt.