Why do regulators, government officials, and central bankers pursue the megabank strategy?
Nouriel Roubini describes something that I never understood:
If my stance against mark-to-market accounting was pet peeve #1, put this as #2. I seriously don't know what the government is accomplishing by creating megabanks. They are significantly increasing the risk for the country and the whole world too. This isn't just the American government and the Federal Reserve either; we have Britain doing the same thing; Switzerland may be doing the same; and so on.
One of the biggest blunders that never came to be was the Citigroup buyout of Wachovia. Imagine how ridiculous the situation would have been if Citigroup had taken over and ended up as an even bigger giant on the verge of bankruptcy. We have a bank like Wells Fargo, which was pursuing less risky business and seems to have been safer, being dragged down by Wachovia; imagine how a weak one like Citigroup would have handled it.
I completely share Roubini's view on this matter. Namely, banks should be nationalized and broken up. AIG, admittedly not a bank, should be broken up. If the government ends up with ownership of Citigroup--it's not clear who owns it--then it should break it up as well. Banks like UBS also have seen the end. Same with Royal Bank of Scotland. The whole notion of creating some megabank that can withstand massive forces is foolhardy. Yes, HSBC seems to have strong footing. But for every HSBC, there are 10 corpses of also-ran megabanks.
I suspect that banking mergers were a popular thing when banking was booming* in the last two decades, but we will probably see the end of it now. Executives with big egos, and shareholders lusting for profits, were more than happy to become big and bigger. But it's probably all over. Unfortunately, the government officials still haven't caught on.
(* My view is that mergers are cyclical in nature. There was a time period, the 70's and 80's, when mergers were very popular within the oil&gas industry. Everyone wanted to become bigger and the CEOs wanted to take over the world--at the shareholder's expense of course. Then in the 90's and 2000's, a lot of oil&gas companies split themselves. Yes, there were some takeovers that made companies bigger--Exxon and Mobil for instance--but the general trend was to "rationalize assets", and "focus" on the core business. Many independent Canadian oil&gas companies, such as Talisman and Imperial Oil, were spin-offs of BP and Exxon, respectively. After all that, the late 2000's saw the return of merger-mania, with many oil&gas companies buying each other out--at crazy valuations of course. One of the dumbest seems to be the ConocoPhillips purchase of Burlington Resources, although the verdict is still out on that. The worst deals were actually in the mining sector so credit needs to be giving to the oil&gas executives for avoiding the insanity of the mining executives.)
Bank takeovers worsened the financial crisis by making firms that were already too big even bigger, said Nouriel Roubini, the New York University professor who predicted the financial crisis.
“The institutions are insolvent,” Roubini said in a Bloomberg Radio interview. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail.”
If my stance against mark-to-market accounting was pet peeve #1, put this as #2. I seriously don't know what the government is accomplishing by creating megabanks. They are significantly increasing the risk for the country and the whole world too. This isn't just the American government and the Federal Reserve either; we have Britain doing the same thing; Switzerland may be doing the same; and so on.
One of the biggest blunders that never came to be was the Citigroup buyout of Wachovia. Imagine how ridiculous the situation would have been if Citigroup had taken over and ended up as an even bigger giant on the verge of bankruptcy. We have a bank like Wells Fargo, which was pursuing less risky business and seems to have been safer, being dragged down by Wachovia; imagine how a weak one like Citigroup would have handled it.
I completely share Roubini's view on this matter. Namely, banks should be nationalized and broken up. AIG, admittedly not a bank, should be broken up. If the government ends up with ownership of Citigroup--it's not clear who owns it--then it should break it up as well. Banks like UBS also have seen the end. Same with Royal Bank of Scotland. The whole notion of creating some megabank that can withstand massive forces is foolhardy. Yes, HSBC seems to have strong footing. But for every HSBC, there are 10 corpses of also-ran megabanks.
I suspect that banking mergers were a popular thing when banking was booming* in the last two decades, but we will probably see the end of it now. Executives with big egos, and shareholders lusting for profits, were more than happy to become big and bigger. But it's probably all over. Unfortunately, the government officials still haven't caught on.
(* My view is that mergers are cyclical in nature. There was a time period, the 70's and 80's, when mergers were very popular within the oil&gas industry. Everyone wanted to become bigger and the CEOs wanted to take over the world--at the shareholder's expense of course. Then in the 90's and 2000's, a lot of oil&gas companies split themselves. Yes, there were some takeovers that made companies bigger--Exxon and Mobil for instance--but the general trend was to "rationalize assets", and "focus" on the core business. Many independent Canadian oil&gas companies, such as Talisman and Imperial Oil, were spin-offs of BP and Exxon, respectively. After all that, the late 2000's saw the return of merger-mania, with many oil&gas companies buying each other out--at crazy valuations of course. One of the dumbest seems to be the ConocoPhillips purchase of Burlington Resources, although the verdict is still out on that. The worst deals were actually in the mining sector so credit needs to be giving to the oil&gas executives for avoiding the insanity of the mining executives.)
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