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Should Banks Use Bailout Dollars to Buy Other Banks?

A number of questions aimed at Sheila Bair and Neel Kashkari during today's Senate Banking and Housing Committee hearing centered on how banks should be allowed to use federal funds allocated through the $700 billion rescue plan.

Sen. Chris Dodd (D-Conn.) asked what the Treasury Department is doing to ensure banks don't use that money to buy other banks, rather than using it to lend money to the customers who need it.

Bair, chairman of the FDIC, said some level of acquisition activity could be a good thing. If a healthy institution acquires a struggling one, the merger could prevent larger failures and protect the federal funds being pumped in, she said.

Kashkari was asked to give a timeline for the program. Banks are now filling out applications to receive federal money, he said, and regulators have begun to give their recommendations about allocating the funds. The Treasury Department is finalizing its own review process.

"$250 billion will be out the door by the end of the year," he said.

Dodd wasn't satisfied. "Give me a better answer than that," he said. "When will we have some money in the hands of the next series of banks?"

"A few weeks," was Kashkari's answer. "It will take time for banks themselves to do their work and sign final contracts."

He added that the hardest part about modifying loans is not the calculations -- "any business school student can do that -- it’s getting to the homeowner. It’s getting them to pick up the phone and call to find out what they can do."

Then he gave a plug to the hotline: 1-888-995-HOPE (It's a phone number set up through the Hope Now program, that helps homeowners at risk of foreclosure.)

Again, Dodd wasn't satisfied. "Why is it up to the homeowner? Why can't the lender make the call? Why isn't it their job to track them down?"

Kashkari agreed that the communication was difficult no matter what.

On the restrictions for how banks can use the new capital, Kashkari said regulators "need to be careful not to be too prescriptive."

"We also don’t want to micromanage," he said. "If we came in with very specific guidance, we were afraid we’d discourage healthy institutions from taking the funds. Those are the ones we want to take the capital because they’re in the best position to lend to consumers."

--Kim Hart

By Kim Hart  |  October 23, 2008; 1:32 PM ET
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