Today's deadline to apply for U.S. government investments through the $700 billion bailout bill Congress approved last month could usher in a new round of M&A for the banking sector.

Wittingly or not, the U.S. government's Troubled Asset Relief Program, or TARP, is likely to end up deciding which banks survive and which either fail or get acquired at a bargain basement price. Government officials administering the program have said it will not be used to prop up

weak banks

. That means any bank that applies and doesn't receive equity from the government will have what amounts to an official stamp of disapproval from its regulator.

"What I worry about is that the media picks up on institutions that didn't get approved for the program and everybody can analyze the fact that they would be helped by this additional capital and it may cause runs on those particular banks," says Tom Brown, head of financial-services hedge fund Second Curve Capital.

This is particularly troubling to Brown, because he believes regulators are prone to making some poor judgments. He cites the case of

National City

( NCC), which had a Tier-1 ratio of greater than 10%, but was turned down for TARP, forcing it into the arms of

PNC Financial Services Group

(PNC) - Get Report

for $2.25 per share Oct. 24, below its $2.75 closing price the day before.

A call to a Treasury spokeswoman was not returned.

"I think what we're going to find out years from now is there is a fairly high element of arbitrary-ness in this," Brown says.

Sixty financial institutions, including giant multinationals like

American International Group

(AIG) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Goldman Sachs

(GS) - Get Report

and a host of smaller companies have received equity investments from the government so far under TARP.

Some banks, like

Wells Fargo

(WFC) - Get Report

, were essentially forced to take the government's money, because regulators insisted they do so to remove any potential stigma for other banks. Others, such as San Antonio-based

Cullen/Frost Bankers

(CFR) - Get Report

can make a legitimate case that they are well-capitalized and don't want to subject themselves to the restrictions that go along with an investment from Uncle Sam. The bank has said it will not seek TARP funds.

Several have said they will apply, but so far have not announced that they have been approved.

Still others, such as

Anchor Bancorp Wisconsin

(ABCW)

, have been silent on the issue. Anchor could sure use the money. According to its third quarter filing Monday, Anchor owes

US Bancorp

(USB) - Get Report

$56 million either by the end of the year or as soon as it can raise the money, whichever comes first.

Mark Timmerman, the bank's general counsel, says the bank's attorneys have advised him not to make any public statements because it is in a quiet period due to a shelf registration filing. Spokespeople for U.S. Bancorp did not return a call or an email message.

Brown thinks regulators will tell banks likely to be rejected not to apply in advance, allowing them to save face by claiming that they didn't apply. That is why Brown expects several banks to say next week that they had a change of heart and decided not to apply after all.

"They'll say they didn't apply, and technically they'll be telling the truth, but you and I will know it's that their regulator told them they didn't have a chance," Brown says.

That could be a big surprise to investors, who seem to be reacting positively on news a struggling bank is applying.

Colonial Bancgroup

( CNB), for example, saw its stock shoot up from $1.41 to $1.83 per share Thursday morning after it said it was applying for government funds. That was before a broad market rally took over in the afternoon, lifting the bank's shares to $2.52 at Thursday's close.