Winding down policies designed to prop up an ailing economy may need to be followed by dismantling some of its success stories, top U.S. regulators said.
Success may have different looks to different folks, but the rescue of banks deemed too-big-to-fail to prevent a systemic disaster in the financial system appears to have been a success. With billions of government dollars poured into large banks, the government leveraged its options with the help of other large banks, turning chaos into mergers and using carrots and sticks to get it done.
Former U.S. Treasury Secretary Henry Paulson Jr. said he was right to threaten jobs at Bank of America when it balked on a months-long pursuit of Merrill Lynch after recognizing Merrill's losses were greater than previously known.
Fast-forward past the finger-pointing testimony of bank executives and regulators and the sideshow on executive pay and the public at large is still left with a larger Bank of America. Wells Fargo & Co. is far larger today having swallowed a mid-crisis appetizer called Wachovia, once the fourth largest bank holding company in the United States (based on total assets).
The same crisis that the Federal Insurance Deposit Corp. said swelled the ranks of its "Problem Banks" list by 36 percent in the previous quarter to 416 banks, has made it possible for JPMorgan Chase, which bought investment bank Bear Stearns at fire sale prices last year, to hold more than 10 percent of the country's bank deposits this year, The Washington Post reported Friday.
Three banks, Wells Fargo, Bank of America and JPMorgan Chase now hold more than 30 percent of the bank deposits in the country, the Post said.
Welcome to the new oligopoly.
"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com.
"You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive," he said.
FDIC Chairwoman Sheila Bair said the creation of larger bank behemoths was "at the top of the list of things that need to be fixed."
The problems, analysts say, are two-fold. First, banks too-big-to-fail have an implied government safety net, which allows them, some say, to attract investors and take irresponsible risks, realizing the government won't let them down.
Secondly, the customer has choices crimped and nowhere to turn if prices increase.
In part, regulatory reform proposed by the Obama administration has reducing bank sizes in mind, Treasury Secretary Timothy Geithner said in an interview.
"The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," he said.
Global markets continued with recent trends this week, the Shanghai Composite index dropping 2.9 percent Friday to close its fourth consecutive week of losses. (In contrast, U.S. markets closed higher Thursday, marking the eighth consecutive day of gains.)
Japan's Nikkei 225 closed 0.6 percent higher. The Singapore Strait Times index fell 0.4 percent. The S&P/ASX in Australia added 0.9 percent, while the Kospi index in South Korea gained 0.5 percent.
In midday trading in Europe, the FTSE 100 in London rose 1.09 percent. The DAX 30 in Frankfurt rose 1.43 percent. The CAC 40 in Paris gained 1.52 percent, while the pan-European DJStoxx 600 rose 1.45 percent.
