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Banks Spurn Government Aid

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Afraid of the strings that come with federal money, lenders go it alone.

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Fool me once, shame on you; fool me twice, shame on me.

American banks are tired of playing the fool.

Results from the so-called stress tests -- administered by regulators to determine the health of 19 key lending institutions -- are being leaked to the press, even as the official announcement of the findings has been delayed for a third time.

Banks -- specifically Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) -- aren't happy with the results. According to the New York Times, early indications are that certain key institutions will be forced to raise capital, sparking renewed backlash against government intrusion into the banking industry.

As confusion reigns, rules continuously change, and federal lending programs produce decidedly lackluster results, the refrain among this country's banks is that they'll solve their problems without Washington's "help," thank you very much.

To be sure, certain firms are already in too deep.

Bank of America and Citi, for example, have already accepted tens of billions in capital and hundreds of billions in federal backstops against loan losses. They have little choice but to submit to Washington's will. To wit: Citi -- having learned a hard lesson from the AIG (AIG) bonus debacle -- is now asking for government permission before handing out any money.

Smaller banks, and those that aren't in nearly such dire straits, see government money as tainted. JPMorgan Chase (JPM) CEO Jamie Dimon said last month that his bank wouldn't "borrow from the federal government, because we've learned our lesson about that."

Bryan Jordan, who runs First Horizon National (FHN) out of Memphis, Tennessee, said his bank was better off working through troubled assets rather than selling them on the open market.

Regulators, engaged in aggressive ad-hockery for the better part of 2 years, have lost credibility. Congress, engaged in egregious political grandstanding, has lost what little trust it had to begin with. Banks, engaged in a fight to remain solvent as well as independent, want to avoid both.

The more Washington insists on influencing the day-to-day operations of the firms it props up, the less inclined banks will be to accept help. Those that can afford to go it alone will do so - even if it means shrinking their operations. This, in turn, could prolong the recession - even as government efforts strive to do the opposite.

Go figure: Central economic planning doesn't work.

No positions in stocks mentioned.

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