Our Topic Is: The Consequences of Bank Mergers

1. Our Topic Is: The Consequences of Bank Mergers Julie SchicktanzKami SevierIan BrayVesa White 8 December 2009

2. Agenda • Why Do Banks Merge? • Case Study • Social/ Economic Consequences • Conclusion

3. Why Do Banks Merge? • Stay Competitive • Increase Accounting Profitability

4. Stay Competitive • Other Competitive Pressures: • Charles Schwab • Boeing Capital Corporation • Bank’s Solution: • Increase size to compete

5. Increase Accounting Profitability • Bank’s Solution: • Increase size to increase customer base Positive Network Externality Increased Customer Base Increased Bank Services

6. Wells Fargo & Wachovia Merger Case Study • Wells Fargo and Wachovia merged on December 31, 2008. • Effect of the Merger on WFC’s stock price

7. Compared with the Market

8. Pros and Cons of Merger • Pros- • More assets and locations • One of the 3 biggest banks in US in terms of wealth • Cons- • Short-run declining stock price

9. Social & Economic Consequences • Small Banks Today • “Old” way of Banking • Big Banks today • “New” way of Banking

10. Social & Economic Consequences • Big Banks are Less Willing to Cater to Small Businesses and Low Income Individuals • 1) “low-touch” Banking • 2) High Fees • 3)Availability of Credit

11. Social & Economic Consequences • What if ONE Large Bank Failed? • Big Banks Require a Large Sum of Money to Bail Out • Taxpayers • Interconnectedness of Banks • Failure of Entire Banking System

12. “Too Big to Fail” • What dose this phrase mean? • Which banks can and cant fail, and when the banks are left to fail what are the repercussions? • When the government decides a bank is too big to fail where dose the money come from to bail them out and does this pose a threat of moral hazard?

13. The Glass-Seagall Act • After the stock market crash of 1929 congress decided to pass the Glass-Seagall act • This Act separated Investment and commercial banking • This law was repealed by Bill Clinton in 1999

14. The Housing Crisis • In 2003 the fed dropped the interest rate encouraging risky borrowers to become home owners • The availability of credit helped drive up housing prices and by late 2006 the entire market was over priced. • Borrowers defaulted on their homes and left the bank to foreclose at a fraction of the amount owed on the properties

15. Bank Expansion • Smaller banks began to struggle and fail and were inevitably bought up by bigger banks • These big banks bundled in thousands of toxic assets in with their good ones. • This bundling caused big productive banks to go under.

16. Solution • Republicans put forth a proposal that would add a chapter to the bankruptcy code that deals with large, troubled financial institutions. • Democrats are also drafting a bill where failing institutions can be dismantled through government intervention without the help of taxpayers’ money. This bill is expected to put a cap on bailouts at 2 billion dollars

17. Conclusion: We learned… • Banks Merge Because • Profitability • Competition • When Banks Merge • Stocks Generally Decrease • Small Businesses Receive Fewer Loans • When Banks Do Fail, Taxpayers Foot the Bill

18. Questions?