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This morning, Hartford Insurance Group (NYSE: HIG) dropped 15% after investors digested its purchase of Federal Trust Bank. Hartford joins Genworth Financial (NYSE: GNW) and others that have sought TARP funds as bank holding companies. Frightened firms are still running for cover as investors hunt down and kill some of the market’s most storied institutions.
The changing landscape is all too familiar for Wall Street. Numerous investment banks, from Morgan Stanley (NYSE: MS) to Goldman Sachs (NYSE: GS), have converted to commercial banks in the past months. Others, like Merrill Lynch (NYSE: MER), have agreed to be bought.
Converting to a bank holding company isn’t a process that most independent institutions want. It restricts the type and amount of investments that a bank can make and requires that deposits be federally insured. The biggest impact is the amount of regulation and new federal scrutiny.
So why are many of the largest institutions rushing to convert?
These firms are reporting heavy losses, dismal quarterly numbers and negative projections. On the surface, the answer is clear: access to the Federal lending programs and the ability to borrow large amounts of capital from the TARP program – at below market rates. American Express (NYSE: AXP), for example, just applied for $3.5 billion after converting.
But the truth is, many of these firms are doing it because it’s popular – everyone else is doing it. They see competitors adding new capital and shoring up positions, and they want in, too. Any competitive edge – like large, low-interest government funds – must be exploited.
These companies are still very aggressive and profit driven. To be sure, when the dust settles in the credit markets, many of these “bank converts” will change back to investment wolves.
Companies mentioned in this article: HIG, GNW, MS, GS, MER and AXP.
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