Bank of America's acquisition of Fleet Bank is a terrible idea, on several different levels. The most obvious is that it eliminates a New England-based top-tier bank. When Fleet, a transplant from Providence, absorbed venerable BankBoston, Fleet executives made much of the fact that this new merger would keep a world-scale bank based in New England. That promise lasted just four years.
The history of these mega-mergers is that the ordinary customer is the loser. In former CEO Terry Murray's drive to make Fleet the region's biggest bank, Fleet was always too preoccupied digesting the last takeover target to provide decent service.
I personally spent more than a decade trying to stay out of Fleet's clutches. I had a good experience with Brookline Trust, which was absorbed by Patriot Bank, which was absorbed by Bank of New England, which was absorbed by Fleet. I moved to BankBoston. Then BankBoston was taken over by Fleet.
Before it approved that merger, the Federal Reserve required Fleet to sell off a large number of branches and accounts, to prevent it from having too large a share of the greater Boston banking market. Without my consent, my retirement account wound up at Sovereign, a bank whose own bonds at the time were trading at junk-bond status. It took months to move that account.
It even took me five trips to the bank, including three meetings with the branch manager, for Fleet to manage to close my checking account. Fleet realized too late that its notorious disdain for the retail customer was a losing business strategy.
Another casualty of Fleet's buying binge was the swallowing up of BankBoston, a locally based and exemplary corporate citizen. Fleet, by contrast, was famous for ruthless post-consolidation layoffs, high fees and bad service. In the aftermath of the banking scandals of the late 1980s, its debt-collector subsidiary Rescorp purchased sub-prime paper, then needlessly called loans, causing the liquidation of many viable small businesses.
Bank of America has a better reputation as a retail banker than Fleet, but in these mega-deals the acquiring institution often pays too high a price, as Fleet did for BankBoston and as Bank of America may well have done in acquiring Fleet. Wall Street analysts have been decidedly cool to the deal. In its immediate aftermath, Bank of America's stock dropped by more than 10 percent.
In general the consolidation of commercial banks has not yielded the promised savings to consumers or even bank shareholders. A bank with, say, $20 billion in assets has plenty economies of scale to purchase technology, design systems and serve customers, as well as plenty of assets to diversify risk.
Why, then, is this merger boom only accelerating? The real answer, gentle reader, is that it makes a handful of insiders very rich, including those who delivered BankBoston to Fleet.
You make a lot more money as top manager of a trillion-dollar bank than of a billion-dollar bank. And with the integration of commercial banking and investment banking, there are far more opportunities for lucrative side deals.
As the recent Enron expose book, The Smartest Guys in the Room, makes clear, the nation's most prestigious Wall Street banks were up to their eyeballs in Enron mischief. They were Enron's enablers. Their executives willingly lent money to Enron's phony off-the-books subsidiaries, in exchange for lucrative investment-banking fees. Many banking executives profited personally.
Bank of America's latest coup is tarnished by its own regulatory woes. It stands accused of providing improper trading advantages to a favored hedge fund manager.
American capitalism worked just fine when investment banking was legally separated from commercial banking and when large mergers were discouraged by regulators. In fact, it worked a lot better, because money was not squandered on losing loans based mainly on conflicts of interest that were precluded by the regulatory regime.
American consumers were also better served when there were plenty of medium-sized banks that considered themselves corporate citizens of their localities. Bank of America is making the same noises that Fleet did about its solicitude for good old Boston or Providence or wherever. But the logic of its role suggests loyalty only to the bottom line.
At his press conference, Bank of America CEO Kenneth Lewis was asked whether the Fleet Center (itself a dubious naming) would keep its name. He replied that Bank of America had a nice ring to it. Here's a better way for Bank of America to prove itself a good local citizen: Call it the Boston Garden.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in yesterday's Boston Globe.
