Commerzbank And A Big American Bank Merger (JPM)(BAC)(WM)(WB)

The Commerzbank buy-out of Dresdner Bank was not a shotgun wedding. Neither institution was failing. The severe balance sheet problems facing may other global money center banks were not an important consideration.

The Commerzbank decision was based simply on added scale and eliminating costs. Media reports are that at least 9,000 people will be cut out of the new company. But, the action does add a level of preparedness if the credit markets get much worse.

The damage done to large US banks, especially from mortgage-related securities is far from over. Other credit debt is beginning to default and should push earnings at financial companies down further. The need to marry weak banks with stronger ones has become acute in America and the efficiencies of the Commerzbank deal makes them more plausible.

If US bank balance sheets do get worse, the weakest institutions will have to be married off with stronger ones. Wachovia (WB) is the most likely to go. Banks of America (BAC) or JP Morgan (JPM) are the most likely to pick it up. Washington Mutual (WM) will be taken out if the credit climate deteriorates. It will almost certainly get pushed together with a stronger firm as well.

Commerzbank’s deal for Dresdner is prophylactic. It protects the new entity by pulling out expenses which, in turn, makes its a better candidate for weathering an ongoing storm.

American banks would do well to take the merger as a template. The market does not need as many big banks as it has. Mergers make for stronger, more efficient companies and that is what a recession calls for.

Douglas A. McIntyre