PNC Leading The Way To Recession

Today PNC Financial Services, Pennsylvania’s largest bank, agreed to buy National City Corp, which is Ohio’s largest bank, for $5.2 billion.  NCC has heavy exposure to subprime mortgages and its stock is down more than 80% this year.

The interesting part is that PNC is funding the acquisition with money it obtained from the U.S. Treasury bailout.  The government’s plans have evolved considerably in the last month.  The original idea, you may recall, was to buy illiquid “troubled assets” and thereby clean up the balance sheets of key institutions.  That idea appears to have been abandoned; now the Treasury is using its massive buying power to buy preferred stock, thereby giving banks new equity capital.  In theory, this is an improvement as the banks will be able to leverage this capital and make more loans to individuals and businesses.  In fact, they are not doing so.  Instead, they are buying other banks.

Now keep in mind that the point of this whole massive exercise is to help the economy, right?  Exactly how a PNC-NCC merger accomplishes this goal is unclear to me. In fact, it does the opposite.  Yes, yes, it might lead to a more efficient organization that will be better for everyone in the long run.  As Keynes famously observed, in the long run we’re all dead.  The more immediate result is going to be massive layoffs as the two banks eliminate redundancies, thereby adding to the unemployment rate and causing even more people to default on their mortgages, thus creating additional downward pressure on real estate prices, which is what got us in this mess in the first place.  Great job, guys.