Banks

new_york_times:http://www.nytimes.com/2008/09/30/business/30citi.html

By ERIC DASH
Published: September 29, 2008
The crisis gripping the nation’s banks took a troubling turn on Monday as investors’ confidence in even the largest and strongest institutions spiraled lower.
Financial shares plunged 16 percent on one of the darkest days for the American stock market since the 1987 crash.
After the House of Representatives rejected a rescue for the financial industry Monday, fears grew that more banks, particularly small and midsize lenders, could run into trouble unless a new plan emerged quickly.
Even shares in the three banks that have survived the crisis as the largest in the industry — Bank of America, JPMorgan Chase and Citigroup — fell more than 10 percent Monday as anxiety gripped markets. Goldman Sachs and Morgan Stanley, which transformed into bank holding companies last week, fell more than 12 percent.
Regional banks were punished even more severely as investors scrambled to figure out which of them might fall next in the absence of a bailout plan. National City Corporation, Downey Financial Corporation and Sovereign Bancorp, lenders pressured by substantial exposure to soured mortgages, were especially hard-hit, falling 63 percent, 48 percent and 36 percent respectively on the heels of the government’s seizure Thursday of Washington Mutual, the largest savings and loan.
“With the credit markets drying up and bank-to-bank lending rates through the roof, the ability of these banks to weather the storm is being called into question,” said Jim Eckenrode, a banking analyst at TowerGroup, a financial services consulting firm.
Wachovia plunged more than 70 percent after it was sold to Citigroup on Monday. Citigroup will pay $1 a share, or about $2.2 billion, for Wachovia’s banking operations. Citigroup will assume the first $42 billion of losses from Wachovia’s riskiest mortgages and transfer to the Federal Insurance Deposit Corporation $12 billion in preferred stock and warrants. In exchange, the F.D.I.C. will absorb all losses above that level.
The reshaping of Wall Street since the collapse of Lehman Brothers just two weeks ago has also touched off a wave of shotgun mergers among the nation’s commercial banks. Those with relatively deep pools of financing are scouring the landscape for weak targets that they believe can give them a more dominant position in the marketplace when the dust from the present financial crisis settles.
“What we have gotten is 10 years of consolidation in the last 10 days,” said Michael Poulos, a partner at Oliver Wyman, a financial services consulting firm. “The current situation has created opportunities for acquirers that are really unprecedented.”
The past decade, in many ways, has been a golden age of banking. Profits were high, buoyed by fat lending margins and relatively few loan losses. Plenty of money was sloshing around in the financial system. And Wall Street’s loan packaging machine helped ensure it would not go dry.
Now, that has all changed. Only the strongest banks are bound to survive. “Over the next two years, we are going to see a lot of consolidation,” said Jimmy Dunne, the senior managing principal of Sandler O’Neill & Partners in New York. “There will be the forced consolidation that we are seeing. There will be bank failures that will follow it up. And then, after a while you will see a large amount of consolidation among smaller and midsize banks.”
Bankers say that the industry is quickly headed to a new era dominated by two types of banks. On the one hand, there will be small community banks and credit unions that offer personalized service and take advantage of their local ties. On the other, there will be behemoths like Bank of America, Citigroup and JPMorgan Chase that compete on the breadth of their products and potential cost savings from their size.
But the towering presence of the biggest banks brings heightened concerns. Bank of America, JPMorgan Chase and Citigroup now sit on more than 30 percent of the industry’s deposits. For consumers, that may turn out to be good news. “They can afford to pay higher rates for deposits and be more aggressive on going after business,” said John Kanas, the former chief executive of North Fork Bank, which he sold to Capital One Financial in 2006. And the bigger the balance sheet, analysts say, the safer customers’ deposits are, because the government will be less likely to allow the institution to fail.
Charles Geisst, a Wall Street historian at Manhattan College, said that belief was now firmly embedded in the financial culture. “Bank of America, Citi, and JPMorgan are going to be quasi-state entities now. They will never be allowed to fail, and they will be closely monitored,” he said. “They are surrogates for the American economy.”
Americans have long had deep reservations about a concentration of corporate power, and for decades reined in banks for just this reason. The McFadden Act of 1927 permanently established the Federal Reserve system, but in a political compromise, imposed a ban on banks opening new branches across state lines. As a result, retail banking was fragmented across the nation.
That remained the case until 1994, when banks won a battle to change the law to permit the creation of national franchises. The result was a wave of consolidation in the late 1990s, paving the way for the formation of the banking industry’s current giants and a handful of big regional lenders.
At a state level, the same thing had occurred in Texas’s banking industry in the late 1980s which, in many ways, may turn out to be a model for today’s nationwide mess. For years, Texas banks lent aggressively to oil and gas partnerships and real estate developers on the belief they would always get paid back. But with a sharp decline in oil prices and a sudden change in the tax laws, the market collapsed.
The result was that virtually all of the largest banks in Texas — names like Republic Bank, InterFirst Bank, First National City Bank, and Texas Commerce Bank — either failed or were snapped up by bigger, out-of-state institutions. Crippled by their widening losses, they pulled back on the amount of money they lent. North Carolina National Bank, which acquired several ailing Texas banks during this period and was Bank of America’s predecessor, earned the nickname “No Cash for Nobody” for its reputation as a stingy lender.
But as the economy rebounded, the bigger banks began gaining a bigger share of the Texas market. Community banks, offering personalized service, saw an opening as a popular alternative. Today, the Texas market is dominated by Bank of America, Wells Fargo, and JPMorgan Chase. But Frost Bank of San Antonio is the only midsize Texas bank left standing, along with a number of smaller lenders.
Ben White contributed reporting.