Bank Civil War Ahead?

In my constant quest to make this blog relevant, I try to post about things that are not being directly discussed by other blogs, at least not in the same manner, and much of this amounts to reaching new conclusions based on facts that are not so new. So tonight I make a prediction regarding an issue that I've already heard about 3 times: I believe that a civil war is ahead in the banking industry: insolvent vs. solvent banks.

Just as the taxes we pay our government smoothes out society by unemployment, health and education benefits, the banking industry is regulated by the FDIC, which has a system of charging a 'tax' from all banks to fund the operation of the FDIC. More broadly, the FDIC along with the OTS, OCC and the Fed, regulate all banks to the same extent, even though banks differ in the extent to which they need to be regulated. That is to say, some bankers behave badly and were clearly underegulated while other bankers have been behaving conservativly and therefore have been arguably overregulated. Other industries work the same way.

While all this is reasonable in a society like ours, the TARP has magnified this situation to an extent that troubles me.

1) Consider the story that broke the news a few days ago about US Bancorp, a relatively conservative bank that counts Warren Buffett as a shareholder. Last week their CEO Richard Davis said that U.S. Bank was told, not asked, to participate in the TARP. Before last week this had mostly been a rumor but now one of the top 20 banks in the U.S. is confirming it as true. I quote from the article:

Davis said he would be “darned” if Minneapolis-based U.S. Bank would suffer collateral damage from the government’s “sloppy attempt at nationalizing the [banking] industry.”

And a second article about the matter:

"We were told not to talk about it," Davis said. Davis didn't detail those strings, but he said he and some peers intend to voice their opinions to Washington, D.C. soon. "Now they're punishing you for having the capital," he said, adding that he refuses to stand by and let his company become "collateral damage in an attempt to nationalize the banks.

2) Now consider a second case, widely reported today. Northern Trust is being trashed by the media for having taken TARP money and having a party at a golf retreat. Well guess what? Just like US Bank, they are one of the banks who were forced to take the TARP. Consider the following passage quoting a company spokesperson:

"Northern Trust did not seek the government's investment, but agreed to the government's goal of gaining the participation of all major banks in the United States," Holt said. [...]Northern Trust became the title sponsor for the event in 2007, about a year before it received federal funds as part of the bank investment program, Holt said. It has a five-year contract to sponsor the event.

Why is this troubling? Because the government is forcing solvent banks to take TARP money and then using that fact to dictate how much a party should cost and whether those banks are allowed to bring Earth Wind and Fire to sing at a golf weekend. This is the ugly type of nationalization.

I'm all for 'nationalizing' BAC and Citi, but don't nationalize USB, TCB and MTB. That is Chavez-like.