Someone asked me the other day what I thought about Congress trying to curb executive compensation as part of the (now failed) bail-out package. I responded that I believe this is one of those classic misdirections put out by the government where the public focuses on one thing which, emotionally, is a nice hot-button topic to act as a smoke-screen for what truly is going on. Very slowly and very steadily, the greatest banking consolidation in history is happening right before our eyes with the government’s blessing and depending on your point of view, this is either one of the best or worse things to happen.
I am not a big believer in conspiracies and shadowy men in shadowy rooms plotting our collective demise. The roots of the consolidation almost seems more accident than design. But, facts are facts. The early and clear winners in the credit crisis so far are (in no particular order):
- Bank of America
- JP Morgan Chase
..and watch Goldman Sachs (see below for why). What have these two done to become the big two so far?
Bank of America benefited from the collapse from Citigroup, its largest rival. If it did nothing else, it would come out better simply based on Citigroup’s implosion. But, in September 2007 (very early on in the credit crisis), it bought ABN Amro North America and LaSalle Bank basically handing BOA the market lead in Chicago and the mid-west.
In the short term, BOA mis-stepped by buying Countrywide Financial but, in the long term, just consolidated its hold on the residential mortgage market (Countrywide had 20% of the mortgage market in 2006). Then, BOA buys Merrill Lynch for an issuance of stock (which creates dilution issues and reduces ROE but keeps BOA cashed up for more acquisitions).
Merrill Lynch may not sound like much right now but its strength is a massive and aggressive sales force. Fuse this with BOA current products and bench strength and this is a long-term strategic acquisitoin.
The result? BOA is now the largest financial services company in the world.
JP Morgan Chase was featured in Fortune Magazine as the financial institution coming out smelling like roses (relatively speaking). It dumped a lot of toxic products before the crash. In the spring of this year, it bought Bear Stearns for effectively nothing. Yes, nothing. To quote Fortune Magazine: “Dimon (the CEO) paid virtually nothing for Bear - just look at the numbers: The $11.5 billion in cash on Bear’s books should fully offset the costs of the merger. Yet J.P. Morgan captured businesses worth as much as $15 billion…”
The kicker? The Federal Reserve backed all of Bear Stearns bad assets (remember this was the first bailout) so they bought the good parts of Bear Stearns and the tax-payer effectively bought the bad parts up.
Last week, JP Morgan Chase bought the assets of Washington Mutual (”WM”) for $1.9 billion from the government (who had seized the bank). Because this is an asset and not share sale, JP Morgan Chase effectively washed itself of most of the liabilities of WM. $1.9 billion sounds like a lot until you consider WM had $188.3 billion of deposits as of June 30, 2008. Assuming even a massive withdrawal of 50% of the deposit base in the intervening 3 months, JP Morgan Chase still stole WM and surpassed its arch-rival Citigroup as well.
You could say BOA turned itself into a powerhouse by aggressive management. JP Morgan Chase was basically handed the keys to the car by the government.
…and then there’s Goldman Sachs who turned itself into a deposit taking institution in September to be eligible for Federal Reserve help. More importantly, because it now has a deposit-base to mitigate against liquidity issues (remember the issue is not financial institutions have no cash; they have no short-term cash), it can “help” the government the same way as JP Morgan Chase. Guess where Henry Paulson, U.S. Treasury Secretary, use to work? He was CEO of Goldman Sachs. Think they may get thrown a few good deals now?
…my investment advisor had a good line yesterday- “this isn’t a crash. This is nothing but a huge transfer of wealth disguised as a crash.”
There’s an urban myth that the greatest number of millionaires was created during the Great Depression. I have never seen a statistic to back this up but I can see how, in great times of change, some dive for cover and others prosper.
