Merrill Lynch & Bank America: Henny penny?
Today, the NYT is reporting that Merrill Lynch’s problems are causing Bank of America to need more bailout money and there is talk about nationalizing the banks. Here’s an email that I sent out to some of the smartest Wall St guys I know on Sept 18, 2008, where my concerns were roundly dismissed. Here’s what I wrote then (emphasis added now):
When Nick and I were playing golf at Stanford yesterday, Nick said that something that puzzled me. He said that bank of america won’t go under with countrywide and merrill lynch because they have all these deposits. There was something to that effect in the NYT too, and John Mack is using it as a justification for merging with wachovia. But here’s the puzzle: deposits are a *liability* for a bank.
So, the answer to the puzzle is that banks have reserve requirements that protect banks (and hence the deposits). And many of the deposits are FDIC insured. I also was thinking about Glass-Steagall act. By covering risky bets with reserve capital, what’s really happening here is that investment bankers are undermining the purpose of reserve requirements.
In other words, as McCain and Obama decry the bailout of AIG, everyone is missing the fact that Thaine and Mack are planting the seeds of a potential crisis of even greater proportion. If/when the government has to bailout large commercial banks to cover deposits, we will be in deep, deep doo doo. And I wonder if anyone is watching as this happens.
Am I just being henny penny here?
So, I do not think that we’ve reached the bottom of the financial crisis yet.