A close look at who wins when banks go a-courting

OK, another bank buyout: big numbers that rumble on Wall Street, promises of efficiency and nationwide reach. But beyond the rhetoric and investment buzz, another story emerges.

As Bank of America plans to take over Fleet Bank - the third largest bank merger in United States history - there is renewed concern with the gradual concentration of power and influence in the banking industry.

To begin with, the buyout is mostly a nuisance for the thousands of people who bank at Fleet. Many have already suffered through bank changes in earlier mergers.

"There's no redeeming value for consumers whatsoever," says consumer advocate Ralph Nader. He sees no new consumer services, no reduction in bank fees - just more absentee ownership for New Englanders.

Of course, you might expect him to say that. But experts point to studies that demonstrate that bigger does not necessarily mean better. Mid-size banks (between $1 billion and $10 billion in assets) have a higher "efficiency ratio" than bigger or smaller banks, according to data from SNL Financial in Charlottesville, Va. That means they pay a smaller share in expenses to generate a dollar of income.

"Smaller banks are able to compete very effectively with bigger institutions," says Christopher James, a finance professor at the University of Florida, Gainesville. That's so at least in areas of most concern to ordinary consumers.

So if the deal isn't about efficiency, what's all the hoopla about?

Bank of America, by paying $43 billion (at time of the announcement) to take over Fleet, will become a truly national bank. That was not possible until passage of the Banking Act of 1999.

It will become the nation's second-largest bank (after Citigroup). It will have branches in most states with a total 9.8 percent share of deposits in the US, according to SNL Financial. By law, BofA cannot make another acquisition that would push its share over 10 percent. It can, though, exceed that percentage by internal growth.

Wall Street has been focused on the financial aspects of the deal. Shareholders of Fleet Bank stand to do extremely well. They will get BofA stock worth perhaps 30 percent or more than their Fleet shares, depending on the value of BofA shares if the deal wins approval of regulators and is completed.

As a result, the top executives and directors of Fleet, with sizable holdings of their bank's stock, also stand to benefit hugely. An analysis by the Boston Herald finds that FleetBoston Financial Corp.'s 18 directors could collectively enjoy a $100 million "pot of gold."

Not everyone's a winner. Presumably BofA directors didn't assume that their company's stock would plunge with the merger announcement, at least not by such a major amount and not permanently. Many analysts, and BofA shareholders certainly, figure the bank paid too much for Fleet.

Most Americans still have plenty of choice in selecting a bank. But the buyout continues a steady decline in the number of banking institutions, although the number of branches is going up. In 1984, there were 14,496 bank institutions with 41,799 branches. At the end of last year, there were 7,887 institutions and 66,185 branches. The number of savings institutions fell from 3,418 to 1,467 during the same period.

Some analysts express concern over the political clout size gives huge financial institutions such as Citigroup, the largest bank with $1.2 trillion of assets, and now Bank of America, a merged $933 billion in assets.

"The financial industry is head and shoulders the single biggest donor to political campaigns,"says Tom Schlesinger, executive director of Financial Markets Center, a Washington, D.C., think tank.

The Center for Responsive Politics, in Washington, D.C., calculates that the finance/insurance/real estate sector of the economy has donated $586 million to campaigns in the 2000-2004 election cycle so far. By comparison, lawyers/lobbyists contributed $276 million; communications/electronics $262 million; energy/natural resources $133 million.

"A centralized [financial] system concentrates political juice in the hands of a few firms that function as major employers and credit issuers in local economies nationwide," Mr. Schlesinger holds. For example: When NationsBank of Charlotte, N.C., took over BankAmerica - assets plus name - in 1998, the combined institution could be assured of being heard from at least 11 state delegations with a total of 179 votes in the House of Representatives, he says. Before the merger, NationsBank had clout in states with 110 members.

Now, says Schlesinger, a merger with Fleet will mean that BofA will have "a direct ability to influence congressional delegations in half or two-thirds of the states."

Because of the influence that campaign contributions provide, bank regulators find it much harder to discipline gigantic banks, adds Edward Kane, a finance professor at Boston College. "You can't threaten them."