The Big Three
A true crisis like America's financial meltdown forces you to focus on the compelling problems right in front of your nose day to day. A lot of important details don't fully register right away.
The sudden and dramatic reshaping of the nation's banking landscape has become one of those details mixed into the daily rush of financial developments and problems demanding instant triage over the past three weeks. It's a big deal, in more ways than one.
Massive consolidation at the very top of the banking food chain has put a few institutions in a completely different class than everyone else. The Big Three: Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co.
The deals they pulled off in recent weeks were important and probably necessary to fight the fire consuming the financial market right now. Whether they are good for the system in the long term, a question about power and influence, has no easy answer.
The Big Three have always been big, but they gained new scale in what passes for the blink of an eye in economic history. Their combined balance sheets control nearly $8 trillion in assets, and their banking operations oversee roughly 30 cents of every deposit dollar in America.
"To find a point in time where individual firms had as much influence over financial markets, you really have to go back to the late 19th century when JPMorgan was essentially the central bank of the United States," says Gary Richardson, an economic historian at the University of California at Irvine.
Consider other banks among the nation's top 50 for a sense of scale. Wells Fargo amp; Co., the nation's fourth-largest bank, is one quarter the size of the smallest Big Three bank, according to SNL Financial, a data research company. The sixth-largest American bank, US Bancorp, is a 10th the size of two of the Big Three. Ten banks among the top 50 are at least a hundred times smaller than the Big Three institutions.
Meanwhile, nonbank competition from Wall Street has been decimated. Lehman Brothers Holdings Inc. and Bear Stearns are gone. Goldman Sachs Group and Morgan Stanley are trying to become banks. Merrill Lynch Co. is selling out to Bank of America.
The Big Three aren't just big, they are now certainly too big to fail. Government officials won't quite say that, but it's true. We wouldn't be able to live with the consequences of their failure, so they will not fail.
They have gotten that big by jumping into the breach and purchasing the likes of Wachovia Corp. and Washington Mutual Inc., exactly what the government desperately needed. If there are going to be any preferred trading partners in the Treasury's presumed $700 billion bailout, who do you think they will be?
Shares of all Big Three banks have traded better than their industry indexes over the past two months. There may be many reasons for that. One possibility: A bank recognized as too big to fail deserves some premium.
Virtually all the transactions that put the big in Big Three solved serious problems. Some were government sweetheart deals and others were just the work of a free market.
Bank of America bought Countrywide Financial Inc., too early and for too much in retrospect, then agreed to spend big for Wall Street giant Merrill, which brings its own balance sheet of nearly $1 trillion of assets.
JPMorgan Chase bought Bear Stearns with a big government financial backstop and then jumped on a failing Washington Mutual, picking up a huge retail deposit base.
Citigroup, by far the financially weakest member of the Big Three, emerged as a late buyer last week by scooping up Wachovia's banking business, which had been America's fourth-largest bank.
A US banking picture dominated by the Big Three may be different than anything we've seen, but it's a familiar scene in many other countries. "This is quite typical of England or Canada, where there are only a few big banks, but it's very different than the American pattern," says Peter Temin, an economic historian at MIT.
The big questions: How will this affect competition? To what degree could the Big Three dictate economic circumstances and policy for their own self-interest? Will they eventually bog down in inefficiency and break up, just like many other muscle-bound conglomerates? "No one knows what the long-term effect of this is going to be," says Richardson. "I don't even think people are necessarily working on this. Everyone is focused on the very short term."
For now, the short term demands that attention. The Big Three will deserve it later.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 