Dark side of American bank consolidation exposed
By Agnes T. Crane and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Wall Street’s titans aren’t paid to sweat the details. That’s become painfully obvious from the foreclosure and mortgage mess that may cost big banks like JPMorgan and Bank of America billions of dollars. The past two decades of bank merger mania brought big cost savings, and temporarily higher stock prices, but left a massive muddle.
In its most recent regulatory filing, JPMorgan said it could rack up to $4.5 billion in legal costs associated with more than 10,000 pending lawsuits, though it didn’t specify how much could be related to mortgage operations. Bank of America faces as much as $1.5 billion in additional litigation and regulatory costs across its businesses and a big battle with bondholders over faulty mortgages.
Back offices running amok are a big part of the current mortgage fiasco. Paper-pushers bore the brunt of cost synergies promised by mega-mergers like the two that created JPMorgan Chase. The Chase-JPMorgan deal of 2000, followed shortly thereafter by a merger with Bank One, cut more than $3.7 billion of costs, justifying tens of billions of value created for stockholders.
Regulators blessed these marriages as bank executives like JPMorgan boss Jamie Dimon argued they would lead to a more efficient banking system. Moreover by removing duplicate costs, primarily in the back office — from overlapping data systems, clearing operations and personnel — banks became more profitable.
Both arguments are borne out by the numbers. Loan-to-deposit ratios are historically around 10 basis points higher for the largest banks compared to smaller ones. In theory that means larger banks can recycle some $800 billion more of the country’s $8 trillion in deposits back into the pockets of consumers, small businesses and corporations.
And at the same time, there’s more profit left for shareholders. Even after all the disruption of the financial crisis, the efficiency ratio of the top 109 banks stood at 59 percent in the fourth quarter of last year, according to the Federal Deposit Insurance Corp, compared to around 74 percent for smaller banks.
The hidden cost of all this “efficiency” is becoming clearer to shareholders. Robo-signing of court documents, hard-to-track paperwork and outright fraud will take their toll on the bottom line for years to come.