Sizing Up Banking's New Giants

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They're done.

Merrill Lynch and Wachovia are no longer independent, officially becoming children of Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) , respectively.

For Bank of America, closing the deal comes with a new title: The biggest bank in the country. With $2.7 trillion in assets, it's now bigger than JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) , although JPMorgan is still quite a bit larger in terms of market cap.

Good news? Perhaps. Now that the two rickety institutions have the backing of stronger parents, the threat of systemic risk to the economy has likely dropped. One of the best bits of news of 2008 was that the 800-pound gorilla of leveraged finance is by and large history.

Still, I can't help but be reminded of Charlie Munger's advice: "When you mix raisins and turds, you've still got turds." While the independence of Merrill and Wachovia are gone, their billions upon billions of soured assets aren't. B of A ended up paying $33 billion for the acquisition -- not too much less than Merrill's $38 billion net asset value at the end of last quarter.

Why is that important? After a year of hearing the phrase "too big to fail" more times than we could handle, what's left of the banking industry is getting bigger and potentially more complex. Part of what necessitated a bailout of AIG (NYSE: AIG  ) was the fact that it has its fingers in nearly every corner of the world. What spawned not one, but two, bailouts of Citigroup was the sheer size of its $2 trillion balance sheet. Rather than shrinking the size and complexity of our largest banks, it almost seems like these mergers simply play hide-and-seek with trillions of dollars in assets.

I realize I'm playing devil's advocate here, seeing how the alternative to bank consolidation -- bank failures -- would ignite a much greater cost to the economy. What's the solution? My personal thought -- and hope -- is that once the financial system starts to stabilize, some of these massive acquisitions will be spun off and broken up.

Back in August, I wrote, "If something is too big and complex to fail, perhaps we should make it smaller and less complex." Now's probably not the time to throw another wrench in the financial system, but someone, someday is going to have to realize that if something's too big to fail, it's also probably too big to bail.

Related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2009, at 3:02 PM, eab12 wrote:

    B of A will not be able to digest the rancid aqusition that is Merrill Lynch and will come close to, if not actually, falling apart completely. They have no liquidity to cover the amount of losses they are in for and will be asking for another hand out by end of 1st quarter 09'. Citi bought Countrywide, what more needs to be said there. JPMorgan on the other hand, much like Wells Fargo, did not need the "government bailout money" and is in a much stronger position than any other contender for strongest, not largest, financial institution in 09'. JP's ceo, Jamie Dimon has lead the company through the recent storm by not following the competition in drunken sailor type lending and by forging friendships with some of the financial world's best and brightest, including winning the confidence of the Treasury dept and FDIC. Good luck to Citi and B of A and who knows, we may yet see JPMorgan Citi in the near future.

  • Report this Comment On January 04, 2009, at 11:14 AM, BeachExec wrote:

    I believe WFC's purchase of Wachovia is not comparable to B of A's purchase of Merrill Lynch. Some turds smell worse than others, price is important, and the geographical banking synergies between WFC and Wachovia produce real value.

    While the author evaluates (albeit superficially) the B of A purchase of Merrill, the same is not done for the WFC purchase of Wachovia. The article reads somewhat oddly due to this omission. I'd be interested in the author's opinion on WFC.

    Disclosure: I own WFC as a long term investment.

  • Report this Comment On January 05, 2009, at 4:35 PM, mickaelangelo wrote:

    1. Citi did not buy Countrywide; B of A did.

    2. Jame Dimon had nothing to do with JPM's best-in-class balance sheet management; that discipline was put in place by the previous mangement team in 2001 (Chemical Bank).

    3. Both JPM and WFC took the maximum TARP allocation ($25BN), claiming they didn't need it but took it anyway is ludicrous.

    On the bright side you did manage to get the acquisition of Merrill by BAC right.

  • Report this Comment On January 10, 2009, at 10:24 AM, nosir4 wrote:

    Breaking up Ma Bell into several babyies worked fairly well I think??? I'm expecting something of the sort to happen when stability returns. What is surprising is that the notion hasn't been discussed by someone with creds and public voice.

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