My biggest concern about the PPIP approach to the banking system is that even if it works, what it does essentially is return us to the pre-crisis status quo—banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail.
Actually, we’d be entering a system even more concentrated than the pre-crisis status quo. Bank of America would have Merrill Lynch, Wells Fargo would have Wachovia, and JPMorganChase would have Bear Stearns and Washington Mutual (potentially becoming JPMorganChaseBearStearnsWaMu, for short). And that might not be all. Last fall Joe Nocera listened in on a JPMorganChase conference call in which one of the executives addressed the $25 billion in federal funds forced upon given them by the government, saying
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Things have probably reached the point where any more large acquisitions have become politically unfeasible, but it’s something to keep an eye on. Banks, like houses, might not come this cheaply again for a long time – if you can manage it (perhaps with the government aid).