The global economy is gripped by its worst financial crisis since the Great Depression. People are losing their homes and their jobs, banks are going bankrupt, and stock markets in the U.S. and elsewhere have fallen significantly from recent highs. Yet, I am more optimistic than I have been for some time. This may strike regular readers as strange, who have read the dire warnings of impending calamity coming from this blog for some time.
The reason for my optimism is that I sense that the banking sector is consolidating as weaker institutions shed assets and stronger ones reap the reward. To be sure, we haven’t hit bottom yet. The GSEs day is coming — not now but they do need much more capital than they have and the proposed solutions to date are inadequate. There will be many major bankruptcies in the global financial sector; IndyMac was just the first of many in the U.S. in particular. And the global economy will almost certainly suffer its first major recession in quite a while.
But witness, the acquisition of Citigroups’s German banking unit by Crédit Mutuel of France. Look at the buyout of the former UK building society Alliance & Leicester by venerable Banco Santander. And read the WSJ’s article on BBVA’s tactical expansion in the U.S. sun belt, an area hit hard by the housing downturn. Finally, there’s the IndyMac failure. Far from a disaster for banking, it was an inevitability that is better having happened sooner than later. All of this speaks to banking consolidation. And consolidation and bankruptcy means a weeding out of weak institutions whose mere presence constricts credit as these zombie organizations deleverage to stay afloat.
So, in the end, we are not even halfway through this credit unwind; we have just begun. Nevertheless, the seeds of recovery are beginning to take root in the form of liquidation of weaker players and consolidation of the financial services sector. This is certainly reason to be optimistic about the future.