Another Financial Utility? BofA & Barclays

My friend and sometimes-colleague, B, emailed me today regarding this recent post about the market values of BofA and CitiGroup.

I failed, in that post, to reiterate that B had predicted this state of events as long ago as 1996- ten years ago. In a phone conversation at the time, so vivid in my mind that I can still recall where I was sitting during it, B foresaw the merger of the major US banks into no more than three super-sized financial utilities. He predicted that they would re-integrate all of the business lines previously spun off or weakened by decades of mediocrity- mortgage banking, credit cards, investment banking, etc.

In that respect, he is the clearest-seeing and perhaps best strategic mind with which I am acquainted.

He further opined, once again correctly, that they would not fare well in terms of total returns. He has mused, and we discussed, how much better it might be for the banks to simply cede simple deposit business to some governmental agency, in order to remove the safety of that business from association with the riskiness of the modern, integrated financial utilities.

Specifically, he wrote to me this morning (because his identity is concealed, and the passage is not unduly specific, I doubt he will mind my quoting from it),

"Remember my model projected that the huge financial supermarkets would resemble large government organizations lacking innovative spirits and laden with beaureaucratic activities. Their size and lack of a usable collective gray matter harnessed to the business is rapidly assuring that this will happen. Ultimately, perhaps the behemoth banks will become government regulated utilities, with at least the benefit of not compensating their senior executives as though they were being rewarded for taking the business-required personal risks that goes with productive innovation."

Now, as if things aren't sufficiently mediocre, we have this rumor concerning BofA and Barclays merging. Talk about cultural clashes!

I'm sure the pundits and investment bankers are all salivating at the prospect of two large, non-overlapping financial institutions being wedded for enormous attendant transaction and advisory fees. To what end? Does anyone truly think that such a combination is likely to earn consistently superior returns for the integrated entity?

As I write this, I am listening to CNBC's coverage of Citigroup's ineffectual solution to its performance problems. A new COO has been named, but Chairman Chuck Prince is being left "in charge," if that is the right term for describing his tenure.

Blogger is, once again, being uncooperative in pasting in stock price charts. However, if you look at Barclays, Chase, BofA, CitiGroup, and the S&P for the past 2 and 5 years, you will see that the pack of financial supertankers move together, with Citi being the worst-performing. I note this by way of refuting what Larry Kudlow just proclaimed, which is that BofA and Chase are now 'coming on strong.' In truth, as my friend B prophesied, they all move pretty much in lockstep, because they are all pretty much identically-structured and managed companies now.

Another merger? Sure, why not. The year 2006 is going down in history as a mega-deal sort of year. Why not end it with another one?