These Banks Are Way Too Big to Fail

Five months ago, Warren Buffett's Berkshire Hathaway (NYSE: BRK-B  ) injected $5 billion of capital into the ailing Bank of America (NYSE: BAC  ) . While the terms of the deal were plum -- Berkshire received $5 billion of preferred stock yielding 6% annually and warrants on 700 million additional shares -- it still seemed uncharacteristically risky for the oracle of Omaha. At the time, the bank's stock had cratered and was trading at lows not seen since immediately following the financial collapse in February 2009.

On a recent foray through the Federal Reserve's public database, however, I stumbled upon data that potentially sheds light on the decision. As you can see in the table below, the size of the four largest banks in the United States, in terms of consolidated assets, has exploded relative to the next largest banks in the country. Much of this was the result of frenzied takeovers in the darkest of days four years ago: Wells Fargo (NYSE: WFC  ) bought Wachovia, JPMorgan (NYSE: JPM  ) acquired Bear Stearns, and Bank of America took over Merrill Lynch.

Bank

Consolidated Assets -- September 2011 (in Millions)

Consolidated Assets -- September 2006 (in Millions)

JPMorgan $1,826,387 $1,173,732
Bank of America $1,466,417 $1,185,581
Citigroup (NYSE: C  ) $1,300,674 $816,362
Wells Fargo $1,142,254 $400,807
USB $319,449 $215,893
PNC Financial $261,236 $135,662*
Bank of New York Mellon $251,529 $91,155**
HSBC $203,675 $166,632
State Street $203,490 $96,873
TD Bank $187,535 $39,454***

Source: Board of Governors of the Federal Reserve. *These assets refer to National City Corp., which was acquired by PNC Financial in 2008. ** These assets refer to Bank of New York, prior to its merger with Mellon Financial Corp. ***These assets refer to Commerce Bancorp, which merged with TD Banknorth in 2007 to form TD Bank.

A table like this raises the question: Did moral hazard play a role in Berkshire's decision? While nobody knows the answer to this -- and moral hazard may have been totally irrelevant given the favorable terms of the deal -- it seems certain that the four largest U.S. banks are no longer too big to fail. They are now way too big to fail. Indeed, call me unimaginative, but I no longer see any reasonable way to unwind these banks in an orderly manner should a future crisis require it.

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Fool contributing writer John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Berkshire Hathaway, Citigroup, Wells Fargo, JPMorgan Chase, and Bank of America. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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