October 25, 2008 – 12:43 pm

For National City Corp, the road to hell was paved with subprime intentions. In business since 1845 and highly profitable at the height of the housing bubble, the Cleveland-based bank got caught in the shock wave of the bubble and dropped onto the balance sheet of PNC with barely a thud. The end came with stunning swiftness for the bank, which was once the 11th largest by deposits in the United States. It was acquired by PNC for a fraction of what had been its market value.

PNC Financial Services Group Inc., Pennsylvania’s biggest bank, plans to buy National City Corp. for about $5.2 billion in stock after receiving U.S. Treasury funds.

PNC will pay $2.23 a share, 19 percent less than National City’s closing price yesterday, to create the fifth-largest U.S. bank by deposits, the Pittsburgh-based lender said today in a statement. The $7.7 billion of Treasury funding, part of the government’s $250 billion plan to recapitalize banks, “put this transaction on a very solid footing,” PNC said.

National City, once among the nation’s top 10 subprime lenders, joins Washington Mutual Inc. and Wachovia Corp. in submitting to takeovers after losses tied to failed home loans. Cleveland-based National City lost more than $3 billion during the past five quarters, and its stock plunged 87 percent this year. PNC is still profitable.

The implosion of National City is a microcosm the credit crunch’s Alice in Wonderland weirdness, where opaqueness equals visibility and not being bailed out by the government means getting huge amounts of taxpayer cash. Witness:

“It certainly beats having these troubled banks end up being taken over by the government,” said David Havens, a credit desk analyst at UBS AG in Stamford, Connecticut. “It’s better for just about everybody that you have a private-market solution and the government facilitating to make sure it happens.”

But what David doesn’t want you to understand is that the bank was taken over by the government, then served up to PNC as an M&A. Didn’t you see where he just said it came from a $7.7B government bailout for PNC?  David, are you there? Is anybody home in there?  Really, there’s more to it than that, David. The implications of this one just keep on compounding.

Let’s start with the tax advantages for PNC. At the working stiff’s expense, PNC is allowed to write off every penny of National City’s write-downs, a la the Wells Fargo “purchase” of Wachovia.  No one should be surprised to see National City suddenly coming clean on previously unseen write-downs.  David, it’s a government takeover sure enough.

By using stock for the purchase instead of cash, PNC may be able to use the government money to boost its Tier 1 ratio, a measure of a lender’s ability to absorb losses. The ratio at the combined bank will be about 10 percent, compared with PNC’s 8.2 as of Sept. 30.

So, PNC gains a footprint covering most of the Midwest and becomes a major force in retail thanks to taxpayer dollars. Good for PNC, devastating to what remains of capitalism. With Paulson and Powell and the same people who got us into this mess in charge of getting us out of it, the end of National City was probably part of an unconscious conspiracy to monopolize the banking sector into one big lump and then divvy them out among “the five families.”

The government had a hand in the deal and probably even forced it. PNC says it received a $7.7 billion investment from the government, under its $750 billion bailout plan.

The amount of the write-offs when the deal is done will be extraordinary. PNC’s CEO said $19.9 billion of losses on the National City portfolio will come in as write-downs at the time the acquisition closes.

But now that conspiracy runs overtly in the open and the true devastation of subprime can rear up:

That says a great deal about major US bank balance sheets. Wachovia (WB) reported a third-quarter loss of $23.9 billion on Wednesday, which say a mouthful about that state of its financials. Under the provisions of its merger deal with Wells Fargo (WFC), it was required to fess up to everything bad it could find. According to Reuters, loan losses from Wachovia could hit $74 billion.

Odd that the really big write-offs only get exposed when these firms are bought. It is almost as if those banks which are still independent are moving a bit slowly in getting all of their cards onto the table.

Did you see that? “Odd that the really big write-offs only get exposed when these firms are bought providing huge tax advantages for the buyer.” Hmm…

In a sign of how weak National City was before agreeing to the sale, PNC expects to mark down the value of National City’s assets by $19.9 billion, or 17.5% of National City’s loan balance.

And as the conspiracy speeds up, the financial media hyperventilates:

The deal is the strongest indication to date of the federal government’s determination to rid the industry of weak banks by pairing them with healthy buyers, which will get capital infusions to help them absorb the bad loans and other problems they are inheriting from acquired banks.

A federal government truly determined to rid the industry of weak banks would do so by letting them fail.

The deal is yet another sign of how U.S. government is flexing its muscles during a period of wrenching upheaval for the banking industry. In the past two weeks, scores of banks nationwide have reported third-quarter results that highlight the cascading series of problems dogging the sector.

Who is in the muscle-flexing Uncle Sam suit during this period of upheaval for the banking industry? Why its Paulson & Pals, Inc. What sort of implications do you think that holds for future of capitalism.


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