Cramer noted that bank mergers were commonplace in the United States, initiated either by financial institutions looking to expand or ones that needed to step up their game. Sometimes regional banks eyed a national presence, while others were simply looking to fend off competition on their home turf.
“And you had banks that seized the moment when they could buy assets for less than they were worth, or as we’d put it in bank talk, less than tangible book,” he added.
Of course, the economic downturn changed that.
Cramer said the effects were threefold.
Wells Fargo, JPMorgan and Bank of America were allowed to grow beyond the rule that limited banks to no more than 10 percent of the nation’s deposits.
“Despite all the hand wringing about ‘too big to fail’ and banks too large to be regulated, this period encompassed the single greatest banking aggrandizement in history, with Wells Fargo now making almost one out of every three loans,” Cramer said. “Thank heavens they’re a good lender.”
Secondly, all the bad housing loans meant that tangible book became meaningless because “everyone just presumed that it was overstated.”
Lastly, acquiring banks were clobbered unless the FDIC sold them the bank, hurting the stock.
“What looked like a brilliant acquisition — First Niagara’s takeover of New Alliance — turned out to be onerous and value-reducing, even as New Alliance had a clean book and very few bad loans,” Cramer said. (Related story:First Niagara CEO on New Alliance deal.)
But the most recent Case Shiller report, which surveys home sales, turned out good numbers this week.
“It’s clear now that the housing inventory overhang is being worked off, that home prices are going up throughout most of the country, and if a bank is long houses that might have been written down already, then you could be getting that bank at a discount,” Cramer said.
“So suddenly the Regions and BBVA rumors don’t seem all that farfetched, particularly when you have banks out there like BB&T that are in good shape and could make an acquisition to get the scale they need if our economy ever recovers.”
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