On big-ness.
An interesting analysis from the Economist on how Bank of America has taken advantage of its size to become one of the most profitable financial institutions in the world.
A huge bank is a huge receptacle for cash. True, Americans are less likely these days to keep their savings in the bank, preferring money-market funds. But more than ever, they need bank accounts for transactions and BofA attracts loads of deposits, paying next to nothing in interest. Through its credit cards and accounts, encompassing 54m households and small businesses, the bank enjoys unusually good insight into America’s financial trends and thus has excellent, proprietary information that it can use to invest the money it has on hand.
All of this could lead to superior returns. Could. Like Citigroup, BofA must be aware that in banking, scale brings problems as well as profits. There is evidence that beyond a certain point scale is counter-productive. Outsiders will cheer too if BofA gets not merely bigger, but better.
The question remains: does size matter?
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Update (from the Economist):
An interesting take on the strategic combinatorial ballet that may play out amongst the internet giants.
Paul Saffo, a Silicon Valley analyst and a fellow of the Institute for the Future, a research group, thinks that any merger between the three middle powers would be a “grand dramatic gesture” that would only hasten their decline. AOL’s merger with Time Warner in 2000 is the relevant warning from recent history. Big mergers also run counter to a number of other trends on the internet today, which are collectively known as “Web 2.0”. “This is the age of mash-ups not mergers, open over closed,” says Mr Saffo, referring to the open internet standards that allow users to combine, or “mash” services.
Another argument against full-blown mergers is that the bigger and more self-absorbed the established powers become, the less likely they are to spot new insurgencies—start-ups such as YouTube, an online video site, for instance, or MySpace. Their equivalents in Prince Metternich’s day were the nationalist and liberal movements that troubled the continental monarchies, and erupted in the revolutions of 1848—forcing Metternich to resign and flee into exile in Britain.
