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.
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