The Wachovia Rescue, Banking Consolidation And Size Limits

Here is a quick look at some graphics related to Citigroup’s (C) rescue of Wachovia (WB), first a graphic comparing the two banks in terms of branches, total deposits, etc.

Graphic courtesy of the WSJ

While the numbers for % of total deposits is over a year old, it stands to reason that my earlier suspicion that Citibank violated the rule of no one bank having more than 10% of the nation’s deposits via a merger or buyout is correct. Because even with a significant amount of money being pulled out of Wachovia it looks like Citigroup now has more than 10% of the nation’s deposits. However it’s not just Citibank, because it appears (based on the graphic below) that J.P. Morgan (JPM) violated the rule when it took over WAMU.

Graphic courtesy of the WSJ

The reason I’m pointing this out is that we’ve already seen what can happen when too much financial influence/power/impact is concentrated in too few companies, we saw it with AIG (AIG) and we saw it with the Mortgage GSEs. While the rescues of WAMU and Wachovia were absolutely necessary and I ‘m not disputing the need to suspend certain rules in times like this, I do think the nation’s banking regulators need to think about the future and how to handle these newly created banking giants.

While placing caps on how large a company can grow does make me very uncomfortable, it’s hard to argue with the idea that breaking these companies up, forcing them to sell branches, deposits, etc, is probably in the best interests of the economy. No matter what we do as far as regulation, the banking industry changing its behavior, etc, etc, it’s inevitable that we will have banking and/or economic crises in the future, and when that time comes I’d feel safer if 30-40% of the nation’s deposits weren’t concentrated within the hands of a very small number of players.

Let’s not forget that over the course of two trading/business days the record for the nation’s largest bank failure was broken twice: first by WAMU and then by Wachovia, do we really want to risk a situation where one of the big three finds themselves in a similar position down the road?

After all Citigroup isn’t out of the woods yet, and who is to say that next time there is a major crisis it won’t be Bank of America (BAC) and J.P. Morgan who are the ones in trouble? Considering their size who would be available to rescue them?

While the business world will balk at size limits, it’s hard to make the argument that it’s against the public’s interest to prevent financial institutions from becoming large enough to threaten the global financial system if they were to run into trouble.

Should the executives of one company be allowed to have the power to take down the global financial markets if they make the wrong decisions?

You can read more on the Wachovia rescue and the changing retail banking industry here.

Sources:

The WSJ: “Citi, U.S. Rescue Wachovia” — David Enrich, Matthew Karnitschnig, September 30, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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