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Analysts see Treasury plan weeding out weak banks

NEW YORK – A number of financial institutions, including Seattle-based Washington Federal Inc., have announced they will receive funds under the Treasury Department’s rescue program to strengthen their capital position.

But what started as an effort by the federal government to spur lending has transfigured, some analysts contend, to a much more grandiose undertaking that will essentially weed out the weak banks from the strong. Critics argue that such a focus puts too much power in the hands of the government in determining which banks survive the credit crisis.

As part of its $700 billion financial rescue package passed in September, the government announced plans this month to pour $125 billion through stock purchases into some large financial companies: JPMorgan Chase & Co., Bank of America Corp. (including Merrill Lynch & Co.), Citigroup Inc., Wells Fargo & Co., Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp. Another $125 billion is now being made available to other banks.

Several of the banks, including SunTrust Banks Inc. and Regions Financial Corp., that have received preliminary approval from the Treasury for investments have said they plan to use some of the money for acquisitions. Each expects to receive about $3.5 billion.

Even smaller institutions, like Washington Federal, which announced a $200 million commitment from the government, plan to deploy some of the money for deal-making.

Roy Whitehead, chairman, president and chief executive of Washington Federal, said the endorsement by the Treasury makes a positive statement about the company.

“It makes it more likely that we will be around for the long haul,” he said.

Washington Federal reported a $39.3 million loss for its most recent quarter, the first for the institution since going public in 1982. Investments in Fannie Mae and Freddie Mac, which were placed under conservatorship by the federal government, accounted for most of the red ink.

While Whitehead said his first priority is to use the funds to support loan growth, the bank, which operates 148 branches in eight Western states, will also look at acquiring smaller institutions within its current footprint.

Additionally, Whitehead said he plans to hoard some of the money as insurance against a long recession. “We won’t fully leverage this capital,” he said.

While the overarching goal of the investments is to bolster banks’ balance sheets so they will begin more normal lending, the Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks.

By doling out money to only the strongest financial institutions, with the aim of spurring consolidation among banks, the government is protecting itself from having to salvage some of the industry’s weakest players, analysts said.

“It appears to us that these ‘gifted’ banks will receive the capital whether they need it or not, as they will likely do the cleanup on behalf of the Fed and the Treasury by acquiring weaker institutions,” wrote Morgan Keegan & Co. analyst Robert Patten in a research note late Friday.