When BB&T announced Friday that it had brokered a deal with the Federal Deposit Insurance Corporation to buy $22 billion of Colonial BancGroup's assets, including deposits and branches, investors cheered the news by heavily buying the former's shares. Friday, BB&T ended up roughly 10 percent on the day, helping the firm to issue a $750 million stock offering Monday to pay for the deal.
Investors in Colonial didn't get so lucky. Instead, they find themselves waiting on news of what portion of a Colonial BancGroup Holding Company they are likely to receive. Given that the juiciest parts of Colonial have already been snapped up by BB&T, shares in the holding company are likely to be worth a lot less than the 44 cents a share the entire bank was trading for before it was halted on Thursday.
The example illustrates some prescient points about how this recovery is taking shape. It is true that there are still a number of beaten-down financial institutions in play with reasonable chances of surviving, such as CIT Group, which announced this morning that it got just the number of tendered bonds it needed to avert bankruptcy. Indeed, there are a number investors who view the chances of investing in banks and lenders at fire-sale prices as a "lifetime opportunity."
But the fact remains: it is far more likely that those institutions which are not still beholden to the government (BB&T paid back its TARP loans in May), or which have the implicit support of the federal government, will succeed right now than those that are hoping to ride the coattails of the recovering economy.
In the case of BB&T, it was the FDIC which emboldened the bank's position. By entering into a loss-sharing agreement on Colonial's assets with BB&T, the FDIC has , in effect, created a maximum downside for the bank of $1.5 billion -- and even that is probably impossible to achieve.
It's tempting to speculate on small, cheap banks doing a David and Goliath on the system. At the end of this cycle however, the result is likely to be fewer, bigger banks. The real beneficiaries of that scenario will not be financial stock speculators, but the big bank chiefs and the anti-trust lawyers who pursue them.