For all the hysteria of last fall's banking meltdown, it could have turned out much, much more chaotically.
I've been wondering where The New York Times has been hiding financial columnist Andrew Ross Sorkin for the past few months. Turns out he's writing a book on the financial crisis. (Because no one's doing that these days. Have you been to a bookstore lately? Holy moley.)
Vanity Fair recently gave a sneak peek into Sorkin's book, which comes out later this month. Sorkin writes that last fall, Goldman Sachs (NYSE: GS ) was all lined up and ready to buy Wachovia. Soon after, a brief melee left Wachovia with Wells Fargo (NYSE: WFC ) , which outbid Citigroup (NYSE: C ) -- and thankfully so.
The Goldman-Wachovia deal was purportedly nixed because of a three-way incestuous relationship between dealmakers:
- Deal maestro and then-Treasury Secretary Hank Paulson was the former CEO of Goldman Sachs.
- Wachovia CEO Robert Steel was a former vice chairman of Goldman Sachs.
- Steel was also a former undersecretary for domestic finance at the Treasury, with Paulson as his boss.
Turns out that papa bear Warren Buffett called out the conflict, after Berkshire Hathaway (NYSE: BRK-A ) was asked to help out with the deal. Not that this kind of stuff is uncommon: JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon sits on the board at the Federal Reserve Bank of New York -- the same agency that brokered and backstopped JPMorgan's deal to buy Bear Stearns. And former Treasury Secretary Robert Rubin was a director at Citigroup while his former employer, the U.S. Treasury, shoveled money down the bank's throat.
After the Goldman-Wachovia deal blew apart, regulators gunned for Goldman to merge with Citigroup. They also "demanded" that Morgan Stanley (NYSE: MS ) sell itself to JPMorgan Chase, apparently telling Morgan Stanley CEO John Mack that he "should be willing to sell his firm to J.P. Morgan for $1 a share."
Sound extreme? Remember, this was a time when the investment-banking model was completely comatose. Goldman and Morgan Stanley desperately needed the stability of a commercial bank's deposits, lest they both turn into the next Lehman Brothers.
Obviously, none of this ever happened. Both deals were eventually ditched, presumably because becoming bank holding companies gave Goldman and Morgan Stanley full access to the Federal Reserve's lending window, commuting their death sentences before things hit the fan.
Moving on
It's still worth asking: What would the financial world look like today had these deals gone down? What if Goldman bought Wachovia? Or Citigroup? What if JPMorgan bought Morgan Stanley?
Two things would have changed: "Too big to fail" would have been supercharged, but the odds of failure (without a government backstop) would have been reduced.
|
Possible Combination
|
Total Assets of Combined Companies
|
|
Goldman Sachs-Wachovia
|
$1.6 trillion
|
|
Goldman Sachs-Citigroup
|
$3.0 trillion
|
|
Morgan Stanley-JPMorgan Chase
|
$2.9 trillion
|
A Goldman-Citigroup combination would have been nearly eight times the size of Bear Stearns -- the first bank we started calling "too big" to fail.
However, these combinations would have nourished investment banks with deposits, instantly ending the nightmare of needing to roll over short-term paper. This was, in fact, the reason why JPMorgan's purchase of Bear Stearns ceased the run on Bear's assets almost immediately.
Now, I know what you're thinking: "How'd that whole commercial-investment bank merger between Bank of America (NYSE: BAC ) and Merrill Lynch end up?" Fair point. But the mergers aren't aptly comparable: Merrill Lynch had a solvency problem after being up to its eyeballs in everything subprime, and that solvency problem carried right on over to B of A. Goldman and Morgan Stanley, on the other hand, simply had liquidity problems after the post-Lehman massacre -- problems that could have been cauterized instantly with a commercial-banking partner, just as they were with the JPMorgan-Bear Stearns deal.
Fingers deserved to be pointed
Again, these deals never happened only because Goldman and Morgan Stanley became bank holding companies, getting all the emergency assistance and backstops commercial banks receive without actually being … commercial banks.
But how reasonable is that? The investment banking model has been proven wholly unstable and maddeningly dangerous. To slap a facade of commercial-banking regulation on it, and assume the problem is solved, is embarrassing. Merging with a commercial bank -- or heck, just starting their own -- would be step one in fixing the root of these banks' problems. Yes, they'd become bigger than "too big to fail." (They still are now.) But they'd be far less likely to fail in a nonsubsidized market. That's a tradeoff I'd actually be willing to accept.
Would you? Let me know in the comments section below.
For related Foolishness:
RSS Headlines
Fool UK