The Problem Facing Chase & Wells Fargo

There's an interesting problem now facing Chase and Wells Fargo banks.

How do they price and take risks when their two largest competitors, BofA and Citigroup, are effectively nationalized banks?

Citigroup's net market value is now less than Federal infusions.

So if BofA's, if my arithmetic is correct. The bank's current market value is roughly $31B, but it has been given two $20B TARP infusions, plus an open-ended $115B loan loss line for the Merrill purchase.

And we've seen that Vik Pandit sold off his brokerage unit to a joint venture with Morgan Stanley under pressure from the Feds. Ken Lewis was forced to consummate a bad merger with Merrill Lynch because of Federal coercion.

How do John Stumpf and Jamie Dimon compete against a force even larger and prospectively more coercive than the organized crime?

Specifically, while Citi and BofA might actually take fewer new market risks now, they alsom might be coerced into accepting losses on consumer loans or mortgages as part of a Congressionally-mandated 'forgiveness.'

Further, as Bill Siedeman noted on CNBC a few weeks ago, as soon as a bank is seen as being backed fully by the Federal government, its capital costs decrease, its need for capital disappears, and, thus, a key cost component is subsidized.

When competing for loan business, will Chase and Wells Fargo use higher internal capital costs, thus making them less competitive?

Chase and Well Fargo, though performing better over the past six months than Citigroup and BofA, per the nearby price chart, have each still lost roughly 40% of their equity price.

How long before investors abandon the latter two banks, fearing pre-emption by the Federal government, to which Ken Lewis acquiesced at BofA?

It's a very interesting and unusual situation never before seen in US financial services. One can't help but think that heavy governmental intervention, to the point of essentially owning two of the nation's largest banks, by assets, will have to have a damaging impact on competition in the sector going forward.