Bank of America might be a shining star if it had restrained its own acquisitive instincts. Instead, it first rescued, then acquired Countrywide, which may have made more bad mortgage loans than any other lender.

Then, as the crisis grew, it picked up Merrill Lynch, an investment bank that had not figured out what you would think was something that any small-town retailer would know: If no one is buying what you are selling, there may be a problem with your product. So it bought its own products  mortgage securitizations  and kept the fees rolling. Unsurprisingly, it, or more accurately Bank of America, ended up losing money on the purchases.

Image Credit... The New York Times

All three acquisitions were encouraged by regulators, who wanted bigger institutions to buy  or at least take over with government help  smaller troubled institutions. Alas, neither the government nor the bigger banks understood the scale of the problem until it was too late. Nor did either bankers or regulators understand just how unrealistic were bank capital calculations.

There are a few well understood lessons from the debacle:

¶It is bad to have banks that are too big to fail. They may coin profits in good times, but the government is left with the bill in bad times.

¶Regulation matters. Banks in countries with good regulation fared the best. Canada has only a few major banks, but they did not get caught up in the credit bubble and are now able to buy American banks. Toronto Dominion ranked seventh in United States deposits in mid-2009, the most recent figures available, before it agreed to buy Chrysler Financial last week.

The Bank of Montreal has agreed to buy Wisconsin-based Marshall & Ilsley, which ranked 25th in 2009. Spain had a property bubble, and has many smaller banks in trouble, but strict rules kept the big Spanish banks from making the same errors that others made. They appear to be healthy.