PNC Financial Services Group Inc. (PNC), which will get $7.7 billion from Treasury’s Troubled Assets Relief Program (TARP), is using that cash infusion to help finance its $5.2 billion buyout of embattled National City Corp. (NCC).

And U.S. Bancorp (USB), which received a $6.6 billion capital infusion from that same rescue package, has acquired two California lenders – Downey Savings & Loan Association, F.A., a subsidiary of Downey Financial Corp. (DSL), and PFF Bank & Trust, a subsidiary of PFF Bancorp Inc. (OTC: PFFB). U.S. Bank agreed to assume the first $1.6 billion in losses from the two, but says anything beyond that amount is subject to a loss-sharing deal it struck with the Federal Deposit Insurance Corp. (FDIC).

While the Treasury Department’s investment of more than $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, buyout deals such as these three show that the recapitalization plan has actually had a much different result – one that’s left whipsawed U.S. investors and lawmakers alike feeling burned, an ongoing
Money Morning investigation continues to show.

Those billions have touched off a banking-sector version of “Let’s Make a Deal,” in which the biggest U.S. banks are using government money to get even bigger. While that’s admittedly removing the smaller, weaker banks from the market – a possible benefit to consumers and taxpayers alike – this trend is also having a detrimental effect: It’s reducing the competition that’s benefited consumers and kept the explosion in banking fees from being far worse than it already is.

This all happens without any of the economic benefits that an actual increase in lending would have had. And it does nothing to address the billions worth of illiquid securities that remain on (or off) banks’ balance sheets – as the recent Citigroup Inc. (C) imbroglio demonstrates.

In fact, Treasury’s TARP program has even managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers are furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

One could even argue that since this first bailout (the $700 billion TARP initiative) has fueled takeovers – and not lending – the government had no choice but to roll out the more-recent $800 billion stimulus plan that was aimed at helping consumers and small businesses – a move that may spur lending and spending, but that still adds more debt to the already-sagging federal government balance sheet.

At the end of the day, these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager and expert on the U.S. credit crisis who is the editor of the Trigger Event Strategist, which identifies trading opportunities emanating from such financial-crisis “aftershocks” as this buyout binge.

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

Lining Up for Deal Money

In launching TARP, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the government’s goal was to restore public confidence in the U.S. financial services sector – especially banks – so private investors would be willing to advance money to banks and banks, in turn, would be willing to lend.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said.

Whatever Treasury’s actual intent, the reality is that banks are already sniffing out buyout targets, while snuffing out lending – and the TARP money is the reason for both.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, says Louis Basenese, a mergers-and-acquisitions expert who is also the editor of The Takeover Trader newsletter. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Indeed, banking executives have been quite open about their expansionist plans during media interviews, or during conference calls related to quarterly earnings.

Take BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the government program. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

And BB&T is hardly alone. Zions Bancorporation (ZION), a Salt Lake City-based bank that’s been squeezed by some bad real-estate loans, recently said it would be getting $1.4 billion in federal money. CEO Harris H. Simmons said the infusion would enable Zions to boost “prudent” lending and keep paying its dividend – albeit at a reduced rate.

Sounds good, right? Not so fast. During a conference call about earnings, Zions Chief Financial Officer Doyle L. Arnold said any lending increase wouldn’t be dramatic. Besides, Arnold said, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

With all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals that Paulson & Co. are helping engineer – JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ), for instance.

If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climates – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors.

The afore-mentioned stealthy shift in the U.S. Tax Code actually gives big U.S. banks a potential windfall of as much as $140 billion, says Gilani, the credit crisis expert and Trigger Event Strategist editor. What does this tax-change do? By acquiring a failed bank whose only real value is the losses on its books, the successful suitor would basically then be able to use the acquired bank’s losses to offset its own gains and thus avoid paying taxes.

“While everyone was panicking, the Treasury Department slipped through a ruling that allows banks who acquire other banks to fully write-off all the acquired bank’s bad debts,” Gilani says. “For 22 years, the law was such that if you were to buy a company that had losses, say, of  $1 billion, you couldn’t just take that loss against your own $1 billion profit and tell Uncle Sam, ‘Gee, now my loss offsets my profit, so I don’t have any profit, and I don’t owe you any tax.’ It was a recipe for tax evasion that demanded an appropriate law that only allows limited write-offs over an extended period of years.”

Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.

Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company.

The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Not everyone agrees with that assessment. Investors who play the merger game correctly will do well. But the game itself won’t necessarily whip the industry into championship form, Gilani says.

“While consolidation, instead of outright collapses, in the banking industry may serve to relieve the FDIC of its burden to make good on failed banks, it in no way guarantees fewer failures,” he said. “In fact, it may only serve to guarantee, in some cases, even larger failures.”

Source: Billions in U.S. Bank Rescue Funds are Fueling Buyouts Worldwide – Instead of Lending at Home

Their valuations would make it tempting – as both firms are trading near their 52-week lows – but Bader al-Saad said it’s more about the companies’ plans for recovery.

“In Citi or Merrill, if there is good opportunity, we will look into it. Do we increase our stake? It all depends on the performance and strategy,” Saad said when asked whether KIA might raise its stakes in both troubled U.S. banks.

In January, the $250 billion Kuwaiti fund agreed to invest $3 billion in Citigroup and $2 billion in Merrill. Back in 2006, the KIA invested more than $700 million in the Industrial & Commercial Bank of China, making it the bank’s No. 1 investor at the time.

In March later, KIA invested an undisclosed amount in Visa Inc.’s (V) historic initial public offering.

Should KIA – the world’s oldest sovereign wealth fund – follow through with its intentions, its contributions would rank near the top in the list of Citigroup’s lifesavers. In addition to the $3 billion Citigroup already received from KIA, the beleaguered Citigroup has received a $7.5 billion cash infusion from Abu Dhabi Investment Authority and nearly $7 billion from Singapore Investment Corp. Pte. since last fall.

And in addition to the previous $2 billion from KIA, Merrill said in late December it would receive a $6.2 billion cash infusion, with up to $5 billion of that coming from Singapore’s state-run Temasek Holdings.

Lehman Looking for Capital

With its stock down more than 16% this week and more than 53% on the year, Lehman Brothers Holdings Inc. (LEH) has begun looking overseas for more capital, The Wall Street Journal reported.

The Wall Street firm has already spoken with one investor in South Korea, where it is well-connected through its vice chairman Kunho Cho, the newspaper reported.

Bailouts Across the Board

State-run sovereign wealth funds currently control $3 trillion – a figure experts expect will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product (GDP) for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, many of these “Global Cash Barons” have been on a spending spree bailing out financials or investing in emerging market upstarts.

For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning’s Investment Report: Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”

Source: Kuwait Sovereign Wealth Fund Considering Bigger Citigroup and Merrill Stakes

Platinum also took a pounding, just coming off its intraday low to end at $1865/oz., down $68. Overnight, platinum has edged lower.

Silver’s decline was even sharper than gold’s, but it did bounce off the $16 mark and rebound up to close at $16.15, down 69 cents. Overnight, silver is trending higher.
(Click here for charts)

The bloodletting in the precious metals continued with a vengeance yesterday, but with gold finding support at $850 and silver at $16, is the worst over? It’s way too soon to tell, as yet.

One thing for certain is that this is entirely counterintuitive. The Federal Reserve’s quarter-point cut on Wednesday is inflationary, without question, which should be gold-positive. But traders seem to be grasping at the straw that the Fed may be done, based on little evidence.

If this is indeed the end of this round of interest rate reductions, then that could be seen as very slightly dollar- and equity-positive. But not to the extent we saw yesterday, with stocks booming and the buck strong.

The truth of the matter, though, is that the Fed wouldn’t have acted if it felt that the economy had been given enough of a cash infusion to perk it up. And it is also true that serious inflation is baked into the cake.

That the market can ignore those important factors in favor of a wispy hope that things maybe, possibly, might not be quite as bad as they seem is a good indication of just how daffy this market is.

Whatever, “gold will remain at risk to further corrections in the coming sessions,” wrote James Moore, of TheBullionDesk.com.

Perennial pessimist Jon Nadler of Kitco goes farther, saying that, “Despite the lack of a clear pause signal in yesterday’s Fed announcement, the markets are treating May/June as the pivot point beyond which they can no longer reliably depend on ever cheaper dollars to fuel speculative binges in commodities.”

But what then will they spend those eroding dollars on?