Business Insider

Peter Crabb: More bank mergers are on the way as bailout unfolds

There is something for everyone in our new laws. The financial-sector bailout bill signed by President Bush on Friday includes better insurance coverage for mental health treatments by requiring equal coverage of mental and physical illnesses.

This mandate was added to the bill as a concession to Sen. Pete Domenici, who advocated such a law for more than 12 years. The financial-sector bailout may pay off for taxpayers if the Treasury can sell the troubled assets at a profit. The costs for the new mandate on health insurance providers will be paid by everyone for years to come.

While the bailout bill is put into action, there are likely to be more bank merger announcements in the weeks to come. The U.S. financial sector is ripe for consolidation. There are thousands of banks in the United States, while the banking sector of other developed countries contains just a hundred or so firms. Clearly too much capacity in the U.S. financial industry reduces profitability. The returns on equity and assets are far too low for this many firms to be competitive.

The financial sector crisis continues to spread outside the U.S. European leaders over the weekend agreed upon a possible suspension to the budget rules for all countries that use the euro. If adopted, this should lead to a further drop in the value of the Euro due to, in essence, expected greater borrowing by European governments. Strangely enough, all the new rules adopted in the U.S. greatly expand our government’s borrowing. All this did little to hurt the dollar while the Euro drops dramatically.

Meanwhile, Asian firms flush with cash are buying, while most U.S. investors flee the stock markets. The yen is rising against the dollar and extremely fast against the euro. Japanese companies are buying stakes in many of the failed U.S. institutions just like Warren Buffett did this past week. Japan, China and Singapore have become major investors in such U.S. icons as Citigroup Inc., Merrill Lynch & Co., and Morgan Stanley.

The dollar and yen are strong. So many investors are using this cash for strategic investments. For every headline about the lower-price stock market, someone is on the buying end of those trades.

Since 2000, Peter R. Crabb has been a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.