Washington Post columnist Steven Pearlstein was online to talk about his latest column on the Federal Reserve's decision to approve Bank of America's acquisition of FleetBoston -- creating the third-largest bank in the U.S.
Excerpt from Pearlstein's column: "[F]or big guys who have always looked to the Fed for political protection and regulatory coddling, the message from the FleetBoston decision is clear: Mergers are too important to let a few instances of corporate fraud stand in the way. All you have to do is launch an internal investigation, blame a few rogue employees, pay a fine that shaves a few pennies off quarterly earnings and promise not to let it happen again."
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
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Alexandria, Va.:
I didn't know the
Fed regulated bank
mergers. Does the
FTC have any
authority?
Steven Pearlstein: The Fed regulates bank holding companies, which is the corporate form for most of the big banks that also have securities firms and investment banks and mutual fund units as well. Although the national banks within those holding companies are still subject to regulation by the Comptroller of the Currency, the Fed tends to take the lead on regulating the big banks.
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College Park, Md.:
great, another merger. I was a member of SeaFirst, a very good local Seattle/Western Washington bank that was very helpful, progressive, and fair. Then BoA bought it. Many loyal SeaFirst members left because of added surcharges and fees (hidden and overt), and moreover corporate malaise just descended on everyone at the branches. I joined a Seattle-based credit union and I am still a member to this day even though I live in Maryland; I do all my bank stuff online and thru shared branches and ATMs through this credit union's co-op network. I will not be part of the BoA machine.
Steven Pearlstein: The bank has pluses and minuses. It is very good on community reinvestment criteria and has lots of very creative programs for investing in inner city areas. It is also a very efficient machine for processing loans of all sorts, as long as the loans conform to the underwriting standards in their computerized review process. But unless you are a big corporate customer, if you want something special or you are a small retailer, they are just not interested. And as you point out, it is a lie to say that bank consolidation has resulted in reduced costs to depositors. When fees are subtracted from interest earned on deposits, depositors are paying more, not less, despite all the "efficiency" gains that have come with computerized banking and ATMs and the line. This is why consumer banking is now considered a big profit center by the banking industry after years of being neglected. There are only a handful of players and there is virtually no price competition among the big players. What is interesting, by the way, is that none of the bank regulators, including the office of the Comptroller of the Currency, have done a systematic report to demonstrate this. So much for their supposed consumer focus.
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Tampa, Fla.:
I'm submitting my question in advance, as I may not be around during your online chat.
Speaking of BofA acquisitions, have you heard anything about BofA buying Morgan Stanley? This rumor floated around late last year, but I haven't heard anything lately. Obviously, acquiring MS would vault BofA into the big leagues of investment banking, combining MS's global strengths in almost all areas of investment banking with BofA's balance sheet. If this happens, what would this mean for independent investment banks -- Merrill, Goldman, Lehman?
Steven Pearlstein: Heard nothing about it. Would be a very big deal, you are right.
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Alexandria, Va.:
So when will charges in the Enron case catch up with BOA?
Steven Pearlstein: They will catch up when courts finally get around to deciding the civil suit brought by angry shareholders and creditors, who will try to go after those who aided and abetted in the fraud. Bank of America is on that list as a defendant.
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Bethesda, Md.:
Wouldn't it be more fitting to blame the Clinton administration for the Fed's reluctance to stop bank mergers. After all, his administration encouraged corporate fraud for years due to lax enforcement.
Steven Pearlstein: I don't think we should get into politicizing this-- that's such a tired and silly Washington parlor game. The Fed for as long as I can remember has favored bank consolidation. They rarely run into a merger they don't like, and they resisted when added criteria, like community reinvestment, were added by Congress. The Fed's basic attitude is that it worries only about risks to the financial system when it thinks about regulating banks. They really couldn't care less about fraud or the harm that may be done to consumers or investors, except as it relates to confidence in the entire system. They figure that's for other people to worry about, or that the market will correct for abuses.
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Mt. Lebanon, Pa.:
So there's going to be one bank left standing when the dust settles out a few years from now. Is that right?
What are they going to call themselves: ChemicalFleetShawmutCitiBankAmericaPNCDollarChaseNationalTrustHoopdedoodle Vault of the Milky Way? Scrooge McDuck, CEO.
Thanks much.
Steven Pearlstein: No, but there will probably be five or six big national financial institutions, with a bunch of little ones in each place. That's what the Fed wants, its what new banking legislation allows and envisions, and it is probably preferred by the other bank regulators as well. And its not just banks, you understand: the policy favors integrated financial institutions providing all sorts of services under one roof, from insurance to investment banking to securities brokerage to mutual funds.
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Arlington, Va.:
My bank, now Wachovia, has gone through so many mergers in the past 20 years. Does the Fed consider the impact of a merger on the customers of the participating banks?
Steven Pearlstein: They are supposed to consider the convenience of consumers, but as I said, they just give this lip service and ignore it. They assume that mergers are efficiency enhancing, efficiency translates into lower price and improved service, ergo the consumer benefits. They understand there are people who want old fashioned, personal relationship banking and they would point proudly to all the small banks left to show you how the market has provided for consumers with this preference. But for most customers, they would say the megabanks are serving the market better than ever before, with more services at lower cost and greater convenience.
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Steven Pearlstein: Well, that's seems to be all the interest we have on this hot banking topic. See you next week.
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Dulles, Va.:
Steve, Is it Greenspan who takes the lead on bank consolidation, or is it more a reflection of the Fed's overall views?
Steven Pearlstein: Oops, a late voice is heard from. Don't know if Greenspan takes the lead. There are several other governors who sit on a regulatory committee and have much deeper banking experience. They include Vice chairman Ferguson and Governors Susan Bies and Mark Olson. I would say they probably take the lead, although Greenspan has been very vocal on how the new era of financial services has been a boon to the economy.
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