Banks Using Your Tax Dollars For Mergers, Acquisitions

This post first appeared on Minyanville.

Banks, it appears, may finally be tired of losing money.

The $700 billion bailout plan rushed through Congress was aimed at shoring up the American financial system, providing banks with capital that they could then blithely begin lending again.

The law of unintended consequences -- already familiar to us following the recent spate of unprecedented government intervention -- is once again rearing its unsightly head.

The Wall Street Journal reports that, rather than extending credit to embattled American consumers, banks may use recently allocated taxpayer funds to gobble up competitors. Zions (ZION) and BB&T (BBT) are eager to go shopping for attractively priced banks, and are considering accepting government funds to do so.

Many argue this is a healthy, natural progression as the banking sector consolidates and prepares for its eventual recovery. Others, however, aren’t pleased to see taxpayer funds funneled into takeovers, which will do little to pump credit into the economy in the near term.

Furthermore, as Professor Sedacca noted on this morning's Buzz and Banter, banks like KeyCorp (KEY) are tapping the government for cash - only to turn around and dole it out to shareholders in the form of dividends. Good for equity owners; not so good for taxpayers.

Lending money to consumers in the past 12 months has been a losing bet. Banks -- obligated to make good on credit lines handed out during better times to individuals and businesses alike -- are finding themselves with more bad loans than they know what to do with. American Express (AXP), heretofore the lender of first resort to the world’s wealthiest, saw third-quarter profits tumble 24% on a 51% jump on credit-loss provisions.

Banks, like any responsible economic actor, act in their own best interests. Irrespective of whatever pressure Treasury Secretary Hank Paulson or French President Nicolas Sarkozy puts on financial institutions to start lending again, government officials cannot force money into the real economy.

The massive amount of liquidity being pumped into the financial system may be a short-term fix for the panic gripping world markets, but self-preservation is paramount during hard economic times. If an acquisition makes more financial sense than extending credit to struggling consumers, banks won't think twice.

A few lost customers or a few angry borrowers is a small price to pay for survival - and the chance to emerge on the top of the heap.