Size Matters

January 15, 2009

MARKETS-STOCKS/“Too big to fail” are four words that should fill U.S. policymakers with dread. They imply a necessity for solvency beyond an institution’s ability to make good business decisions. They’re also a badge of achievement that commands a bit more swagger on Wall Street.

So when Bank of America, with $2.7 trillion in assets and 308,000 employees, says it needs more help in the form of billions of dollars from taxpayers, which we have set aside for just this kind of mess (the Troubled Asset Relief Program), you could argue that this is both economic blackmail and reward for a job well done.

What happens when a bank becomes too big to fail? It gets shrunk down to a size more collapsible. The titans of Wall Street know a thing or two about being in hock to the people. Take a look at Citigroup. It’s all well and fine for CEO Vikram Pandit to say the sale of his brokerage business to Morgan Stanley was not mandated by the government, which has lent Citi $45 billion to stave off failure. But it’s hard not to see a wink and a nudge in there somewhere. This was not some non-core, fringe business — it’s more like an arm or a leg.

The big restructuring plan Citi is expected to announce tomorrow is seen taking Sandy Weill’s “financial supermarket” down in size by about a third. That may still be too big to fail, but it’s getting a lot less so by the quarter. And what of Morgan Stanley, the purchaser of Citi’s arm or leg or whatever. Lehman Brothers was deemed not too big to fail; how does Morgan stack up, now that it’s getting bigger?

Oddly enough, outgoing U.S. Treasury Secretary Henry Paulson – yes, the guy holding the TARP strings — is reported by The Wall Street Journal to be driving the Bank of America talks out of concern that the bank might not have the money to complete the buyout of Merrill Lynch. Almost seems like insurance we the people are taking to make sure we can keep our biggest banks too big to fail.

In other Deals News…

* South Korea hopes to raise 4.6 trillion won ($3.4 billion) via state-run firms selling stakes in domestic companies, including Korea Life and GM Daewoo, in its latest move to reform state-run institutions.

* French bank BNP Paribas may bid for about 60 percent of custodian-services business Caceis, jointly owned by rival banks Credit Agricole and Natixis, La Tribune reported.

* Spain’s Prisa cannot agree on a price to sell its Digital+ pay TV unit to potential buyers Telefonica and Vivendi and has pulled out of talks, Negocio reported citing sources close to the talks.

* Ahli Bank of Qatar said the Gulf state’s sovereign wealth fund would begin buying shares in the lender next week and would take 10 percent of its share capital by the end of 2009.

(Photo: Buckshot the bull is corralled in front of the New York Stock Exchange as part of a promotion, January 8, 2009. REUTERS/Brendan McDermid)

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