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With Wachovia merger, banking a land of giants

By E. Scott Reckard
Los Angeles Times
With Citigroup Inc.ís government-brokered deal to swallow up most of rival Wachovia Corp., the country moves a step closer to a banking landscape dominated by a handful of goliaths.
The diversified operations and national retail footprints of these super banks ó Citigroup, Bank of America Corp. and JPMorgan Chase & Co. ó draw comparisons to the banking business in other highly developed nations, whose financial systems are dominated by a few gigantic banks overseen by a single powerful regulator.
ěI donít know if the government is inadvertently or intentionally building giant financial companies like in Japan or the U.K., but itís turning out that way,î said Gerard Cassidy, an analyst who follows banking companies for RBC Capital Markets.
New York-based Citigroup, the largest U.S. bank by assets, agreed Monday to pay $2.16 billion for Wachoviaís banking operations and also to shoulder the first $42 billion in losses on a $312 billion pool of troubled Wachovia loans.
The loans include adjustable-rate mortgages inherited from Oakland, Calif.-based Golden West Financial Corp., the parent of World Savings, which Wachovia acquired in 2006.
The Federal Deposit Insurance Corp. would be on the hook for losses over $42 billion, but the FDIC said it didnít expect any losses. Depositors wonít lose a dime, even on uninsured deposits, the FDIC said, just as they were fully protected last week when JPMorgan Chase took over Washington Mutual Inc.
Citigroup also took over Wachoviaís obligations to its bondholders. But Charlotte, N.C.-based Wachovia itself ó what remains is mainly its brokerage and a unit that manages funds for institution investors ó saw its stock hammered.
The shares already had been down 74 percent for the year as delinquencies increased on Wachoviaís adjustable-rate home loans, commercial real estate loans and Wall Street operations. They fell from $10 to $1.86 Monday, an 86 percent decline.
The deal, the latest in a series of emergency transactions reshaping the tottering banking industry, could result in closures of some bank offices.
Banks typically close some branches and eliminate jobs of support staffers to cut costs after taking over a rival. Citigroup said it would close less than 5 percent of the combined banksí branches.
In agreeing to take over Wachovia, Citigroup joins Bank of America and JPMorgan in working with regulators to take over competitors that have run out of cash or are loaded with failing mortgages. Bank of America swallowed Merrill Lynch & Co. and Countrywide Financial Corp., and JPMorgan took over Bear Stearns as well as Washington Mutual.
Citi, JPMorgan and B of A are by far the largest U.S. commercial banks, with Wells Fargo & Co. now a distant fourth.
The trend will lead to greater regulation, however. The Federal Reserve and the U.S. Treasury, as a condition of helping troubled financial institutions, are forcing the combinations of big banks and requiring lightly regulated Wall Street companies to become commercial banks. Commercial banks are highly regulated and are required to have a far larger cushion against losses.
Several experts said itís likely that the insurance industry, now regulated by individual states, eventually will be moved under the umbrella of a federal regulator, since the government took over the giant New York insurer American International Group, along with mortgage giants Fannie Mae and Freddie Mac.
ěThe organizing principal is that if an institution is big enough to pose a risk to the overall system it may need to be subject to federal regulation,î said Jim Wilcox, a University of California, Berkeley banking professor.
Insurers were among the institutions that would have been helped by the Bush administrationís proposed $700 billion bailout ó a rescue plan that was available only on condition that the beneficiaries give the government more control over them going forward.
The Houseís rejection of the bailout Monday is unlikely to derail the trends toward consolidation, increased limits on certain risky financial derivative products and the move to empower regulators, said Donald F. Kettl, a political science professor at the University of Pennsylvania.
He said pressure for additional regulation is mounting not only in the U.S. but also in nations where the fallout from the U.S. credit crunch is creating ěa global financial crisis.î
To be sure, the idea of more regulation of bigger companies strikes many as a flawed model.
University of California, Los Angeles banking professor Avanidhar Subrahmanyam said that regulators should protect ěthe little guyî through deposit insurance and other safeguards at retail banks, but the country generally will be better off when companies are allowed to compete freely and to fail if they make bad mistakes.
ěRegulators will never be able to keep pace with financial innovation,î Subrahmanyam said.

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