JP Morgan (JPM) Chief Predicts Bank Mergers

Jamie Dimon, head of JP Morgan (JPM), predicts that there will be a large number of bank mergers, especially in the US and Germany.

Dimon may be right. It makes sense for battered financial institutions to band together and cut out redundant costs. Weak assets of divisions which are not strategic can be sold off to raise cash. Regulators would probably not block deals because they are concerned about the health of the financial system.

But, the plan for putting together big banks and perhaps investment houses has a weakness. First, history says it does not necessarily work. Citigroup (C) is one of the most "merged" companies in history. It has banking, brokerage, wealth management, and insurance pieces. Many analysts argue that the reason the big bank is in so much trouble is that it is too large and complex.

There is another reason that mergers may not take place. The Wall Street Journal pointed out today that no one knows how bad the balance sheet problems are at Countrywide Financial (CFC). And, that is after several months of concern about the company’s future. No one knows how bad the problems are at Citi affiliates SIVs. In other words, much of the trouble in the financial markets is still hiding in places where it cannot be seen.

Merging makes sense, but not when the risks of a combined entity cannot be known until after the fact.

Douglas A. McIntyre