The FDIC-assisted BB&T acquisition of Colonial is ironic and inexplicable. The acquisition means that federal regulators have allowed a bank, already "too big to fail," to continue to grow massively.

BB&T's acquisition of Colonial shows the banking system's weakness, not strength.

First, why allow banks that are too big to fail to grow, much less grow massively? This maximizes moral hazard, the elite banks' political power, and the risks of regulatory capture. Banks that are too big to fail should not be allowed to grow, and they should certainly not be allowed to grow through taxpayer-subsidized acquisitions of other failed banks. Banks that are too big to fail pose systemic risks. They need to be shrunk and intensively regulated.

Second, why allow BB&T to be the acquirer? Extreme growth is one of the primary warning signs in banking. Extreme growth through acquisitions is an additional warning sign because it creates extraordinary opportunities for accounting abuse through purchase accounting.

Acquisitions provide massive opportunities for "financial gimmickry" and accounting abuses, and it should be obvious by now that such gimmickry and abuses were common over the last decade and were rarely spotted by markets or the SEC. BB&T conducted 60 acquisitions in 38 years (an average of 1.6 per year). BB&T may well have "weathered the economic crisis" better than Citi and BofA, but that does not demonstrate that it is solvent, much less healthy.

Third, BB&T's acquisition of Colonial shows the banking system's weakness, not strength. BB&T appears to have been the only acquirer willing to purchase Colonial - even with substantial FDIC assistance. That indicates that Colonial was in awful shape and that the financial markets' problems are not being recognized honestly for accounting purposes.

Fourth, Colonial and BB&T reflect the astounding weakness of financial regulators. Neither bank should have been allowed to grow at the rates they did, particularly through acquisition. Neither has undergone the vital, serious scrutiny of their accounting for the acquisitions. Colonial was allowed to follow practices that were certain to cause short-term accounting profits and ultimate failure of the bank. When the OCC finally began to crack down on Colonial (and that occurred only after it was deeply insolvent on any real economic basis), the bank switched charters to escape even belated supervision.

When escaping the OCC proved inadequate to hide Colonial's growing insolvency, it reacted with yet another move demonstrating the (A) critical weaknesses and dangers of the bailout, (B) the continuing scandal of the regulatory "competition in laxity" (and the OTS' sad role as every "control fraud's" favorite financial regulator), (C) the dangers of "private equity", and (D) the continuing violations by regulators of the "Prompt Corrective Action" law. The tale, in brief, is that once the regulators recognized that Colonial was hopelessly insolvent, they still didn't close it (despite the "Prompt Corrective Action" law mandating that they do so). Instead, they decided to throw more taxpayers dollars away in an attempt to bail out the existing managers that had enriched themselves by causing Colonial's failure.

The largest banks remain the primary cause of systemic risk. BB&T's acquisition of Colonial has only compounded that risk.

About the Author: William K. Black is Associate Professor of Economics and Law University of Missouri - Kansas City and the author of: The Best Way to Rob a Bank is to Own One. Previously, he was litigation director of the Federal Home Loan Bank Board; deputy director of the FSLIC; SVP and general counsel of the Federal Home Loan Bank of San Francisco; and senior deputy chief counsel at the Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

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