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Financial Mergers and Their Consequences
The past quarter century has witnessed among other things a radical transformation in the structure of the U.S. banking industry, attributable largely to a wave of mergers, and the most severe, long-lasting recession experienced by the United States since the 1930s. It would be reckless to claim that the two are closely linked causally. The recession that began in late 2007 resulted from a perfect storm combining financial industry innovation, greed, and deception; imprudence on the part of beleaguered consumers; the legacy of prior crises leaving traditional institutions for home financing decimated; a securities rating triopoly whose reward structure favored optimism over truth-telling; abject regulatory failure; a beneficent but misguided Congressional policy fostering more widespread home ownership; and dangerously expansive monetary policy pursued by the U.S. Federal Reserve. This paper focuses on the changes that emerged in financial industry structure, conceding at the outset that they were only one component of a larger problem. Simple causal chains are even more difficult to establish. The most direct causal link was backward from crisis to government bailout, since the leading banking firms became so large relative to the U.S. financial infrastructure and so systemically interdependent, in part due to cross-trading of risks, that individual actors' imminent failure threatened even more grave macroeconomic repercussions.