OK it's been a month or so since the "Financial Crisis" became part of our vocabulary. Since then the stock market has gyrated wildly, large banks and investment houses have either failed or were bought out and the federal government passed it's $700 billion "Bailout Plan". On October 24, 2008 PNC Financial Services Group Inc., announced it would buy Cleveland-based National City Corp. PNC will receive more than $7 billion from Treasury, bolstering its ability to complete the $5.08 billion deal for National City. Very interesting how this happened. TheWall Street Journal provides a timeline associated with the PNC purchase of National City Bank. Here is another blog post from the Prudent Speculator discussing the National City situation.
What I found interesting was:
National City had been trying to sell for several weeks. All of the possible suitors had pulled out of the bidding by October 13 and National City had decided to move forward and hope for the best. They contacted the Office of the Comptroller of the Currency in the Department of the Treasury regarding selling assets to the government in the new TARP Program (Troubled Asset Relief Program). The Government basically said that National City had to seek out M&A alternatives and that the capital infusion, asset sales and debt guarantee programs in the TARP program were allocated at the discretion of the government and that National City would not have that option available to them.
US Bancorp re-entered the bidding for National City after the regulators assured US Bancorp that the government would provide capital to finance the takeover. The initial bid was $1.10 a share which went up to $1.30 a share. This deal was all but done until PNC submitted an 11th hour, $2.25 a share, bid. The PNC buyout was completed within an hour of the offer.
This is a great deal for PNC. They got the deal done at a 19% discount from the previous day's close. The acquisition makes PNC Financial the nation's fifth largest bank by deposits and will give it the fourth most branches. All done with house (tax payer) money.
National City shareholders may not be excited about the deal but the fear was that if conditions continued to deteriorate the bank could collapse under pressure of dwindling deposits and continued losses. National City had been at the top of my watch list of troubled banks for several months so I was not surprised when this happened.
The question is whether the government is doing the right thing in propping up the banking industry like it is. Clearly there needed to be an injection of capital to keep the system liquid. Banks were holding on to their cash and not lending to other banks in the Fed Funds market. Had this continued it would have clearly led to defaults. So what we have right now is a system on life support getting cash pumped in to the system to provide liquidity. This is not going to be enough to stop the wild swings in the market but assuming that banks use these funds to provide loans it will keep those of us on Main Street moving forward. That is really the key. It is imperative that the small businesses survive. Entrepreneurial innovation is what will bring the economy out of recession. Large, public corporations live by the quarterly results and often make decisions that are not in the best interest of long-term growth. Small to mid-sized businesses are the ones that plow their profits and cash back in to the business to create jobs and bolster the economy. Hopefully the bailout and any ensuing regulation will lead to innovation and job growth and not provide opportunities for greed to cause future economic meltdowns.