NEW YORK (Reuters) - The U.S. government may say its investments in the nation's banks are mostly passive in nature, but there's little doubt it is playing an active role in reshaping the industry and setting the stage for mergers.
Many deals in the sector will need government participation in some form, ranging from capital injections into banks under the Treasury's Troubled Asset Relief Program (TARP) to assisted transactions for weak and failed institutions, experts said at the Reuters Global Finance Summit this week.
"TARP is going to say you are going to live or die in the near term," said Anton Schutz, president of investment advisory firm Mendon Capital. "So those companies that have not or won't get TARP, I think the regulator is already telling them do something."
Under the $700 billion program, the Treasury is injecting capital into financial institutions and potentially buying consumer loans and related securities. The Treasury considers merger opportunities as one factor when it decides which banks get government help.
A $125 billion initial round of funding went to nine large banks, including Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz). Another $125 billion has been committed to smaller institutions. There are more than 8,300 banks in the United States.
"A lot is going to be sorted out fairly quickly about who gets in and who doesn't," said Gary Parr, deputy chairman of investment bank Lazard Ltd (LAZ.N: Quote, Profile, Research, Stock Buzz). "We will see more in December onward, sort of beyond TARP."
The deadline for public banks to apply for capital under TARP is Friday.
TARP money could also be a catalyst for private equity money coming into banks.
Lightyear Capital, a private equity firm, is talking to a number of regional and community banks that it considers investment opportunities, said Chief Executive Donald Marron.
"In the case of financial services, what we have found -- we've looked at hundreds of companies -- is in the end what has held us back is we're not sure we understood them completely," Marron said. "The degree that TARP will resolve that, and I think it will and I think it's designed to, then it will make it easier to go forward."
Government assistance could also come into play in takeovers of failed banks, offering investors protection at a time when it remains difficult to value assets that don't have a market.
Private equity firm TPG TPG.UL saw its $1.35 billion investment wiped out when the government closed Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) and sold its banking assets to JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz).
"How does one get protection? One is to go through FDIC-assisted processes. There can be a cleansing there," Parr said. "(Investors) are trying to figure out how to protect their downside."
FOREIGNERS LEFT OUT
The government's extraordinary intervention is keeping one source of capital -- foreign banks -- out of the U.S. financial system, said Bank of Nova Scotia (BNS.TO: Quote, Profile, Research, Stock Buzz) Chief Executive Rick Waugh. Continued...
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