The negotiations over the bailout of America’s financial services industry have taken several turns over the last week: from hopeful, to morose, to comical, to exasperated, to resolved. It looks like the bill will pass at this point. And I tend to think it’s a good thing. The amendments have made the bill stronger than before, and there is less taxpayer risk than with the original Paulson plan. That said, I don’t think it’s something to celebrate. We will be hamstrung in our ability to address other crises in the next year.
Perhaps most troubling is that it may not work. Just hours after news of the bailout agreement arrived, Wachovia announced its veritable collapse and takeover by Citigroup. These bank failures are becoming commonplace nowadays. But they are seismic events in the broader scheme. We have only three major banks left in America: Citigroup, JPMorgan Chase, and Bank of America. Regionally, there are plenty of survivors. Here in the South we have Regions Bank, which may fill some of the gap left by Wachovia. But the banking industry is quickly moving to Too Big To Fail territory as consolidations reduce competition and place most financial assets in a few institutions.
The bailout did little to protect Washington Mutual and did nothing to prevent the fall of Wachovia today. Who’s next?
As of mid-morning, the Dow is down around 300 points. The anxiety continues on Wall Street as investors wonder who is next to fall. That the government may bail banks out of their bad investments has yet to turn things around.