This is an aspect of the bailout by government that deserves more attention and this article is a good start. It is from the Wall Street Journal. The government is helping to make huge firms even larger, so large that they will be able to demand they be rescued if they repeat the reckless behavior which created this mess in the first place. Also competition will be less and these firms are large enough to have huge lobbying budgets to advance their own agenda. Those thousands of people losing their homes unfortunately have no money and no lobby group to advance their interests. All they have is a lot of rhetoric about recognising their difficulties.
Note too that now the bailout --sorry rescue plan now--has to hire experts to determine the value of the toxic assets that the government is going to buy. That expertise lies with those who worked for the firms that were involved in this mess. Many of these experts are now unemployed and will jump at the chance to get a high-paying job with the government. Will they be any better at evaluation now!
Industry Is Remade in a Wave of MergersBy ROBIN SIDEL and DAMIAN PALETTAWall Street JournalSEPTEMBER 30, 2008The notoriously fragmented American banking system is going through adecade's worth of consolidation in a matter of weeks, with the U.S.government often acting as matchmaker.At the end of last year, the three lenders that are now the largest in U.S.banking -- Bank of America Corp., J.P. Morgan Chase & Co. and CitigroupInc. -- collectively held 21.4% of all U.S. deposits. Now, with this month'sgovernment-backed sales of the banking assets of Washington Mutual Inc. toJ.P. Morgan and of Wachovia Corp. to Citigroup, the Big Three instantly havea combined 31.3% of U.S. deposits.For more than a decade, banking experts have predicted an industry that isshaped like a "barbell" -- a few big banks at one end, thousands of tinyones at the other and little in the middle. But that trend played outslowly, because many middle-tier banks were able to stay independent thanksto a robust economy. Now, with the financial crisis spreading, that middletier of banks is starting to disappear."The consolidation is a natural part of credit cycles," said Sheila Bair,chairman of the Federal Deposit Insurance Corp. "This is what happens whenyou get into credit turmoil."The consequences of this warp-speed consolidation will likely reverberatefor years. For customers, it means less choice and the potential for higherfees as the big banks get more pricing power, further pressuring smallerrivals. For the economy and government officials, the very size of thesebanks means they should be better insulated from big shocks because theirbusiness lines are so diverse. But it also means these banks now may be seenas too big to fail. That notion could lead banks to take big risks if theythink they'll be bailed out if they fall on hard times.The deals of the last two weeks are a supercompressed version of the eventsthat happened over 10 years in Japan. More than a decade ago, Japanese bankswere damaged so badly from loan problems caused by reckless lending toproperty developers and a plunging stock market that the government spentnearly $440 billion in tax money to bolster them, and nationalized thesickest ones to prevent a panic in the financial market. The governmentprodded various banks to merge but the process took years. Now, these banksare bigger and healthier. In a twist of fate, one of the creations of theforced consolidation in Japan, Mitsubishi UFJ Financial Group, clinched adeal Monday to acquire 21% of Morgan Stanley & Co.In the U.S., consolidation still has a long way to go and could be painfulif smaller banks fail to attract much-needed capital to stay independent."There are still more than 8,000 banks in this country and many of them haveemerging issues in commercial real estate and commercial lending," saysCharles Wendel, who runs Financial Institutions Consulting Inc., aRidgefield, Conn.-based firm that advises banks. He predicts that as many as1,000 banks will cease to exist -- through acquisition or failure -- overthe next two years.A slew of regional banks saw their stock prices get crushed Monday asinvestors worried about their prospects. National City Corp. of Cleveland,which earlier this year received a $7 billion capital infusion led byprivate-equity firm Corsair Capital LLC, tumbled 63% to $1.36 in 4 p.m.composite trading on the New York Stock Exchange. Sovereign Bancorp Inc., amid-Atlantic lender that has been hit hard by its expansion into newmarkets, fell more than 72% to $2.33 a share. Fifth Third Bancorp, aregional lender based in Cincinnati, fell $7.05, or 43.6%, to $9.11 onNasdaq.The Best HopeThe best hope for many banks is for healthy institutions to snap up thosethat are struggling. Wells Fargo & Co., which has historically eschewedacquisitions, pored over the financial records of Wachovia and is now viewedas being on the prowl. Other regional players that are considered to bebuyers are U.S. Bancorp of Minneapolis and PNC Financial Services Group ofPittsburgh. Representatives of Wells Fargo, PNC and U.S. Bancorp couldn'timmediately be reached for comment."Any bank with a halfway decent board has to take the initiative. It'salmost too late for some of them," Mr. Wendel said.The shift of more deposits into the hands of the banking behemoths isalready drawing ire from the nation's smaller players, which contend thatthe government is helping their bigger rivals at the expense of smallerinstitutions."If this latest crisis hasn't taught the policy makers anything, it shouldhave taught them that big isn't better, and that if you create institutionsthat are too big to regulate and too big to manage, you are going tothreaten the American taxpayer directly," said Camden Fine, chief executiveofficer of Independent Community Bankers of America, an industry tradegroup.Some banking industry officials have begun calling for the government totemporarily raise deposit insurance limits, particularly at smallerinstitutions, because of fears about more depositors withdrawing cashquickly in what regulators are calling "silent runs."At an emergency board meeting Monday at 6 a.m., the FDIC took theunprecedented step of citing "systemic risk" to intervene and assistCitigroup's acquisition of Wachovia Corp. The government entered into aloss-sharing agreement with Citi that will put the government on the hookfor losses if the value of certain risky mortgages deterioratesprecipitously.The FDIC doesn't expect the collapse of WaMu or the near-collapse ofWachovia to cost the government money, but it establishes a growingpre-emptive regulatory philosophy that seeks to act quickly and prevent theescalation of the domino effect already occurring among financialinstitutions."The FDIC has always had an effect on the private sector by what it does,"former FDIC Chairman William Seidman said. "You can say it picks winners andlosers, that's true. It's inherent in its job."The banking industry had undergone a wave of consolidation since the 1980sfor several reasons, dating back to the savings-and-loan crisis and thenpicking up again after in-state banking laws were loosened last decade. In1987, there were 17,345 federally insured banks and thrifts. In 1997, therewere 10,924. Last year, there were just 8,534. But the most profounddifference is that the consolidation appears to be happening only at the topof the industry -- and only in dire scenarios.Mr. Seidman said the FDIC's action with Wachovia will only emboldeninvestors or other banks that want government assistance in acquisitions.House and Senate lawmakers are planning to redraw the regulatory landscapeof the banking industry next year, and one issue that's likely to come underclose scrutiny is the cap that prevents any bank from holding more than 10%of the nation's deposits after certain types of acquisitions. With three bigbanks now hovering around that cap and smaller banks needing saviors, it'sconceivable that the longstanding resistance to the cap could evaporate.Fallout for ConsumersThat could result in some fallout for consumers. With fewer players, thosebanks will have more power to control prices that are paid for deposits.WaMu, for example, had been wooing new customers for months with unusuallyhigh rates on certificates of deposits. The thrift was still offering 5.00%on a one-year deposit as of Monday, according to BankRate.com. Bycomparison, J.P. Morgan, which typically doesn't chase deposits withaggressive rates, was paying 2.25%."WaMu had to pay above-market interest rates to attract deposits recently,but that strategy won't be necessary anymore," said a J.P. Morgan spokesman."Any time you see a large player in the field be acquired or go under, theeffect on the consumer tends to be negative," says William McCracken, chiefexecutive officer of Synergistics Research Corp., an Atlanta-based firm thatconducts market research on the financial-services industry.Small banks that competed with WaMu are already girding for competition fromJ.P. Morgan. Although J.P. Morgan is unlikely to match WaMu's CD rates, thebig New York bank is expected to woo new customers with a slew of offeringsthat smaller institutions don't provide, such as wealth management.Carol Kobuke Nelson, chief executive officer of Cascade Financial Corp.,says she was deluged with questions from WaMu customers at a dinner partylast weekend. The community bank based in Everett, Wash., competedhead-to-head with WaMu and plans to emphasize its customer services andcommunity activities when J.P. Morgan bursts into town."They certainly offer a broad array of products that we don't offer, butthere's definitely a niche for community-banking services that we are tryingto take advantage of," she said. Among other things, Cascade is hoping toattract former WaMu customers with its interest-bearing checking account.___________________________________