I work in the banking industry; I’m naturally skittish right about now (and have been for over a year now), darn it!
Today, my “out-of-left-field” thinking led me to the idea that a major bank (let’s call it WaMu) would merge with Goldman Sachs. This quote from GS’ CFO cements the deal for me (which I read after my epiphany and to which I’ve added my emphasis):
Chief Financial Officer David Viniar appeared to strongly rebuff the market’s growing sentiment that the fabled Wall Street firm should find a traditional bank with whom it can merge. “Most assets we have couldn’t be funded by deposits” at a traditional bank, Viniar said on a conference call with analysts to discuss Goldman’s third-quarter earnings. In the last six months, two struggling Wall Street investment banks have been acquired by large commercial banks – including yesterday’s purchase of Merrill Lynch & Co. (MER) by Bank of America Corp. (BAC) – and a chorus of analysts and investors have speculated that Goldman will enter a similar merger. Traditional banks typically enjoy more stable businesses, as well as the ability to borrow money inexpensively from depositors. As a result, these commercial banks have become natural merger partners for struggling investment banks, whose businesses are typically more volatile in nature, and much more vulnerable to negative market sentiment as well as the need to borrow capital at expensive terms.
So here’s the deal: Goldman will do the opposite of what’s been done recently: Rather than a retail bank buying an investment bank, the hunter becomes the hunted and the investment bank buys the retail bank.
Bank of America just became the biggest investment bank in the country with this deal:
Overnight, the deal will make Bank of America the county’s largest player in wealth management. It already runs the biggest branch banking network and it is the biggest issuer of small business, home equity and credit card loans. The Countrywide deal made it the nation’s biggest mortgage lender, too.
Goldman cannot afford to let BofA get bigger. Goldman had to say what they said today. Their stock had already taken a bath based on the horrible earnings announced today. They have to wait for several days before they can do anything because their deal will most definitely be a stock deal. First, they have to wait until their stock rises a few dollars per share. Then, they do a deal. Now, of course, I have no inside information and haven’t bought anything, but I think a deal is imminent. It’s a matter of who buys whom. The “if” is no longer a question.
Either that, or Schwab buys WaMu. Either one works and broadens the market coverage of the dealmakers.
The arrogance. The willingness to see hundreds, thousands, lose their
jobs as a result of their pronouncements and manipulations. Masters of
Business all, they have been taught to see corporations not as places
that employ people and provide a product or service, but as numbers on
a balance sheet, a balance sheet that serves only one group: Investors.
The IMF has predicted that total write-downs driven by the mortgage crisis will hit over $1 trillion. Only about half of that has hit the markets so far.
Well, there is an end in sight, but it surely will mean the loss of trillions in equity for investors in the affected banks. I’ll reiterate my call for perseverance, as the survivors will emerge from this wiser, richer, and much better-positioned to not only weather a future storm but also control their markets in a much more powerful way (read: Oligopoly-power).
The cooperation that is occurring amongst the bigger banks will also contribute to collusive powers that only make them stronger and you’ll see these companies move in lock-step for a time. Eventually, there will be innovations in banking and some will break from the pack, but that will take at least 5 years. Probably more like 10.
But rest-assured, your deposits at any of these banks are safe. The government cannot — and will not — allow the FDIC and other insurers to fail.
So, please, hunker down. Hope for the best. Plan for the worst. Odds are, you’ll end up somewhere in between in the short- to intermediate-term, but you’ll get to the best sooner than the rest. And that’s not a bad place to be.
Says Hudson City Bancorp’s CEO:
There are fewer banks to finance houses in the New York metropolitan area and that’s led to increased volumes for us.
He goes on further to say:
If you isolate 7 states Michigan, Ohio and Indiana which are auto related and Florida, Arizona, California and Nevada you pretty much have isolated where the housing crisis is centered.
I wonder what it feels like to be the only bank in the country who got this right? All hyperbole aside, it’s refreshing to see a bank operate like in the old days, where the highs weren’t nearly so high and the lows weren’t nearly so low. The volatility in these companies (earnings, revenue, stock price) is enough to scare people off for a long, long time.
Want articles like this delivered to your inbox? Subscribe today!
Don’t forget to take a look at the development of my soon-to-be-published eBook, Stock Investing Basics. I’m publishing rough versions of each chapter every few days.