What about all that nationalizing? I know there’s been a lot of hand-wringing about the government’s takeover of AIG and Fannie Mae and Freddie Mac, and about the inconsistency of bailing out one firm, Bear Stearns, while leaving another, Lehman, hanging out to dry, and, not least of all, about taxpayers footing the bill for greedy Wall Street executives’ incompetence. And don’t get me wrong: I’m no fan of Greenspan or Bernanke or Hank Paulson, either. They helped steer us into this mess. But the fact is, they had no choice but to do what they did. Am I worried about setting a dangerous precedent of bailouts? Sure. Do I resent my tax dollars being spent this way? Yes. But had the government looked the other way, the stock market would have truly crashed—another 2,500 points at least—and we would have been in far deeper trouble. In a sense, the system worked. Your tax dollars provided insurance against a far bigger calamity. As it is now, I see more turbulence for investors in the short run—that’s Wall Street gibberish for volatile stock prices—but one thing I don’t see is a disaster. In fact, I believe we will come out of this mess healthier and more risk-averse, which is good for everyone in the long run.
Which brings us all the way back to Hudson City Bancorp. What we learned during this period is that funding—steady funding—is the real lifeblood of a bank, or any corporation’s, growth. We learned that the only banks that don’t have to go hat in hand and throw themselves on the mercy of strangers, as Bear and Lehman and Merrill did, are the banks with gigantic deposit bases that can be used to loan and borrow against.
Of course, Hudson City doesn’t aspire to be the nation’s largest financial institution. But JPMorgan and now Bank of America, with its acquisition of Merrill, sure do. Because of their huge deposit bases, those two multiheaded giants will most likely become the dominant players in American finance. They can issue mortgages and have enough money in their coffers to own the mortgages outright, which can be very lucrative if you underwrite safely. That’s something institutions without billions in huge deposits at their disposal, like Goldman and Morgan Stanley, simply can’t do. It’s why Goldman’s executives were asked repeatedly last week if the firm needs to merge with a savings bank in order to survive and become more profitable (even though I believe Goldman is still the traditional investment bank best positioned to go it alone). It’s why Morgan Stanley was talking to Wachovia and the Chinese. And it’s why the Street loves the Bank of America–Merrill hookup—because the brokerage operation can now benefit from the deposits. The new Bank of America “looks like” JPMorgan, which, thanks to its federally arranged shotgun marriage with Bear, is now the most revered financial institution in America. Coming up behind JPMorgan and Bank of America will be Wells Fargo and US Bancorp, two other deposit institutions that are now set to capitalize on a new world where there they can afford to make and keep mortgages on their books. (Washington Mutual, for the record, was subject to doomsday rumors last week not because it’s a savings and loan but because it’s a badly managed savings and loan. Its reckless lending practices have been among the worst in the business.)
If you want to be in the incredibly lucrative mortgage game going forward, you are going to have to mimic the Hudson Cities of the world—banks that know their customers and demand down payments and don’t risk giving loans to those who could turn out to be deadbeats. That’s right, what we’re seeing is a return to the era of good, clean, old-fashioned banking, an era in which the winners will be those banks that look just like the Bailey Bros. Building & Loan, or at least have an old-school deposit component at their core. Their owners and operators may not make as much money as the Potters once did, but at the end of the day they get to keep their jobs. And they’re still the richest men in town.