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Customers Are The Losers In Bank Mergers
Published on Sunday, July 9, 2000 in the Boston Globe
Customers Are The Losers In Bank Mergers
by Robert Kuttner
I have been running away from Fleet Bank for several years, but Fleet keeps acquiring my bankers. In 1991 I became an inadvertent Fleet customer when Fleet acquired Bank of New England (which had acquired Patriot Bank, which had acquired Brookline Trust). Fleet laid off my reliable and courteous branch manager. They replaced her with frazzled, less expensive novices. Turnover was high and service dreadful. So I switched to BankBoston. Now BankBoston belongs to Fleet, and so, once again, do I. For now.

When Fleet acquired its prize catch last year, Fleet's CEO, Terry Murray, made clear that the big gains would come from consolidating branches and laying off employees. To preserve a semblance of competition, the Federal Reserve Board required Fleet to sell off some 300 branches representing more than $12.5 billion in deposits. The principal buyer was a Pennsylvania-based outfit called Sovereign Bank Corp.

These two maneuvers have created untold customer inconvenience, ranging from incompatible ATM cards to disrupted relationships for borrowers. At my branch there are long lines at the teller windows and even longer ones to see the few harried officers. A minor transaction can consume an hour.

Worse still is the hassle for customers whose accounts were sold, sometimes to remote locations. A retirement account of mine landed at Sovereign, which took on huge debt to buy 285 of Fleet's New England's branches. Sovereign's own bonds were subsequently downgraded by two rating agencies to junk-bond status.

I asked a Sovereign representative who would be responsible if a Fleet depositor suddenly found his account at Sovereign and the bank failed. ''The FDIC,'' she replied. And what if the account exceeded the FDIC maximum? ''I don't know,'' she said, ''but I don't like this any better than you do. I used to be at Fleet. They didn't just sell your account. They sold me.''

At one point, Fleet, overly eager to please the regulators, was actually refusing to take back customers who hadn't asked to have their accounts transferred to Sovereign. After Sovereign complained, Fleet relented.

If there are consumer benefits to this deal, they have yet to materialize. In April, Fleet raised charges for some 2 million former BankBoston customers.

Was this trip really necessary?

Prior to the Reagan era, banks were tightly regulated and mergers were rare. Policy changes in the 1980s allowed bank holding companies to operate pretty much like ordinary businesses, and bank mergers became common. Terry Murray, who built Fleet on several acquisitions, was a pioneer.

The Federal Reserve now encourages such consolidations. The Fed's chairman, Alan Greenspan, believes that American megabanks are necessary for safety, efficiency, and global competitiveness. In Greenspan's view, there is a place for small, community-oriented banks and a place for big global ones. But midsized regional banks like the former BankBoston need to buy or be bought.

Before deregulation, bank failures almost never occurred. There was no shortage of bank credit, and bankers actually had time for customers. Fees today are higher, not lower. And since deregulation, failures of banking institutions have cost taxpayers hundreds of billions.

America may once have had too many small banks. Some mergers made sense. But there is no good economic reason for shotgun marriages like the Fleet-BankBoston affair. These, after all, were respectively the nation's ninth- and 15th-largest banks. Surely a $73 billion bank (the former BankBoston) is large enough to have ample scale yet still local enough to have some community loyalty.

Boston's Mayor Thomas Menino, area congressman, and Massachusetts Attorney General Thomas Reilly opposed the deal, but to no avail. BankBoston, more than Fleet, had a reputation as the genuinely community-minded bank. And the community was better served by robust competition between these two banks.

Indeed, a prime incentive for mergers is to reduce competition. In this case, the merger occurred both because of the regulatory climate favoring consolidations and, ultimately, because of a sweetheart deal.

In exchange for delivering BankBoston to archrival Fleet, Charles Gifford, then chief of BankBoston, got personal rewards in the tens of millions, including a variety of stock options, employment guarantees, and a golden parachute if he is fired. The deal calls for Gifford to succeed Murray as Fleet CEO at the end of 2001. But many observers think Murray has one more big deal up his sleeve.

When you look closely, a huge merger is often less about efficiency and benefit to the community than it is about a few insiders getting very rich. But not with my money.

Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.

Copyright 2000 Globe Newspaper Company


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