And the big keep getting bigger

Some folks are a little nervous that the Federal government is getting too much control of the financial market. What with the Fed propping up Bear Stearns, and the takeover of Lehmann Brothers, Fannie Mae, Freddie Mac, AIG, and the distinct possibility of a new Resolution Trust Corp., there is clearly room for market manipulation following the political imperatives of government.

But, what about the banks themselves? Isn’t anyone concerned that the big are getting too big? We’ve seen Merrill Lynch swallowed up by Bank of America. Next to go looks like it will be the #2 investment bank, Morgan Stanley, who could become part of Wachovia. And will giant savings-and-loan Washington Mutual go to the behemoth Citibank or Wells Fargo? No word, yet, who J.P. Morgan Chase, Bank of New York Mellon Corp, or Goldman Sachs will end up with. But, you can bet the universal banks, with their swollen balance sheets and ripe ambitions, will take onboard the risk and buy up the bargain-basement priced entities! Of course, they will have to race against the big overseas banks, like HSBC, Barclays, Deutsche Bank and the like, who would dearly love to have more control over the vagaries of the American financial system!

Looking overseas is instructive. When Lloyds TSB took over HBOS/Halifax, they became huge. They now have 1/3 of all savings accounts in the United Kingdom and 1/4 of all UK mortgages. And, you know what they can do when they control that much of a retail market? They raise prices.

There’s lots of economic advantage in being big. You have the reserves, and the disposable assets, to ride through many a financial storm. You have the management capability to deal not only with crises, but also to take advantage of the crises. And, of course, you become too big to fail ensuring an implicit government guarantee (read: socialization of risk).

Ironically, one of those investment banks that looks as though it is going to swallowed up by a shark, Morgan Stanley, was formed in 1935 by former executives of J.P. Morgan & Co. after Congress barred banks from securities underwriting in 1933 in a reform enacted after the market crash of 1929.

Isn’t anyone worried that history might be repeating itself?

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One Response

  1. Interesting post. I just did a Google Trends graph of the top 5 banks on my Word Face-Off blog. The only bank not to have increasing Google-popularity is JP Morgan. It also came in dead last even though it supposedly had the 2nd highest total assets. Do you have any idea why this would be? Thanks.

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