Who values big banks?

By Felix Salmon
January 23, 2010
The Epicurean Dealmaker has some stern words for those -- Andrew Ross Sorkin springs to mind -- who would say that there are some things only big banks can do:


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The Epicurean Dealmaker has some stern words for those — Andrew Ross Sorkin springs to mind — who would say that there are some things only big banks can do:

The assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock… Wholesale institutional clients make a point of using more than one investment or commercial bank for virtually all their financial transactions, no matter what they are. In fact, the bigger the deal, the more banks the customer usually uses. This is because banking clients want to 1) spread transaction financing and execution risk across multiple service providers and 2) make sure none of these oligopolist bastards has an exclusive right to grab the client by the short and curlies. Just look at securities underwriting data, for chrissakes: as the number of independent investment banks has shrunk (and their product lines, geographic reach, and balance sheets have swollen) over the past 20 years, the average number of book running underwriters per transaction has risen. This is not the result one should expect if one believes customers prefer to use giant universal banks as one-stop shops.

The next time that you hear a senior investment banker intoning ponderously about the importance of being able to serve clients across multiple geographic regions and asset classes, ask for references. These banks all claim to be so client-focused, but where are the clients’ encomia to the megabank model?

If there was a wave of jubilation in corporate America when JP Morgan bought Bear and BofA bought Merrill, I think I missed it. Is there a single multinational saying “this is great, now we can use just one institution for all our banking needs”? Of course not. And even if there was a bank big enough to keep the entirety of a $20 billion loan to Pfizer on its own balance sheet, there’s no way that Pfizer would accept such a deal.

Being big is great, if you’re a big bank. But for the rest of us, big banks do little but increase systemic risk. There’s certainly no indication of any economies of scale when it comes to things like fees on our checking accounts. So the next time you think that someone else surely values these banks’ size, think again. Yes, they can be extremely profitable. But that doesn’t necessarily mean they’re valuable, on a societal level.

3 comments

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There are always people out there who, out of self interests (bankers defending banks comes to mind) or sheer stupidity, simply don’t see the difference between what’s good for interest groups and what’s good for our collective well being as a nation. “What’s good for GM is good for America”, they said back when. REALLY?

I have a simple, non-bank example against BIG. Remember couple years ago when we could still get free cell phones by signing one year contract? Not any more, right? Because the number of cell phone operators are down to what, a grand total of 3??? Where the h#$l was the DOJ? Anti-trust Unit?

Sure, the mobile companies have a right to swallow up smaller competitors; but what about MY freedom to choose? Those phony politicians who are, oh soooo into protecting my freedom, where were they??? To think anything other than that they were bought and paid for by corporate interests and care nothing about our freedom, is, beyond stupid. I’m fed up, as you can tell.

Posted by jian1312 | Report as abusive

@Jian,

As someone who works for small wireless company (less than 50,000 subscribers) your theory that there are 3 cell phone companies is ridiculous. There are about 40 an I guarantee you in your town there is more than 1 that is not Verizon/ATT/T-Mobile/Sprint. Also, all the cell phone companies still give away free phones, but they are crap phones that no one wants to buy so they don’t advertise them. We sell them to Grandma’s who want something to keep in their car in case of an emergency.

Also, as for your freedom to choose a new cell phone provider, cell phones still compete with land lines, with internet and with driving over to your buddy’s house and engaging him face to face. The competition (and your freedom) is pretty great.

As for buying corporate interests, as soon as finish off this steak dinner with these six senators, I’ll talk about that.

Posted by okobojicat | Report as abusive

I trade FX for a corporate, and the worst thing that happened to my book was the BOA/Merrill merger. I use several bank counterparties (to ensure better pricing, reduce credit exposure, get better Christmas presents, etc), and the BOA/Merrill merger meant that because BOA had lots of exposure to my firm, and Merrill had lots of exposure to my firm, BOA/Merrill had too much exposure to my firm. The result? A decreased line of credit. So much for one-stop shopping.

Posted by MitchW | Report as abusive