Julie SchicktanzKami Sevier

Ian BrayVesa White

Our Topic Is: The Consequences of Bank Mergers

8 December 2009

AgendaWhy Do Banks Merge?

Case Study

Social/ Economic Consequences

Conclusion

Why Do Banks Merge?

Stay Competitive

Increase Accounting Profitability

Stay Competitive

Other Competitive Pressures:Charles SchwabBoeing Capital Corporation

Bank’s Solution:Increase size to compete

Increase Accounting Profitability

Bank’s Solution: Increase size to increase customer base

Wells Fargo & Wachovia Merger Case StudyWells Fargo and Wachovia merged on

December 31, 2008. Effect of the Merger on WFC’s stock price

Compared with the Market

Pros and Cons of MergerPros-

1. More assets and locations2. One of the 3 biggest banks in US in terms of

wealth

Cons-1. Short-run declining stock price

Social & Economic ConsequencesSmall Banks Today

“Old” way of Banking

Big Banks today“New” way of Banking

Social & Economic ConsequencesBig Banks are Less Willing to Cater to Small

Businesses and Low Income Individuals

1) “low-touch” Banking

2) High Fees

3)Availability of Credit

Social & Economic ConsequencesWhat if ONE Large Bank Failed?

Big Banks Require a Large Sum of Money to Bail OutTaxpayers

Interconnectedness of BanksFailure of Entire Banking System

“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?

The Glass-Seagall ActAfter 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This law was repealed by Bill Clinton in 1999

The Housing CrisisIn 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

Bank ExpansionSmaller 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.

SolutionRepublicans 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

Conclusion: We learned…Banks Merge Because

ProfitabilityCompetition

When Banks Merge Stocks Generally DecreaseSmall Businesses Receive Fewer Loans

When Banks Do Fail, Taxpayers Foot the Bill

Questions?