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Too big to fail?

Question: Is Bank of America too big now to fail??? Do we have to few institutions? Jeff, Arlington, IN

Answer: Yes, Bank of America is too big to fail.

I expect with the benefit of hindsight that the deal struck by BofA to buy Merrill Lynch for about 40 cents on the dollar will turn out to be shrewd move. For one thing, the bank has snapped up one of the most famous brands in the country--let alone on Wall Street--at a bargain basement price. For another, BofA has made sure after this acquisition, the purchase of Lasalle Bank, and the takeover of Countrywide Financial, that in the eyes of regulators the financial services behemoth is too critical to the U.S. financial system to fail. Indeed, management has spent $100 billion over the past 5 years on acquisitions, according to the Wall Street Journal. The buying spree puts BofA at the top of the U.S. financial services industry

To your second question, the financial sector is reorganizing and shrinking. But it was probably too large to begin with, growing at a rapid pace over the three decades or so. It has grown to a much larger share of GDP than we've seen in the past. Consolidation is long past due.

That said, when it comes to our own banking I don't see any reason to do business with the biggest. The real key is the FDIC (or its credit union peer). So long as there is FDIC insurance, and your business with the bank is covered by the government's insurance safety net, then you should feel free to bank at a community bank, a regional bank, or your local credit union. The question remains whether a bank the size of BofA can deliver good service at a low cost to its customers. The good news is that there are plenty of competitors eager for your business if it doesn't.

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