Are mergers the answer?

Most observers say part of the problem the world economy is facing come as a result of the massive size of companies like Citigroup and AIG. They became too big to manage, too big to fail (hence, knew they would receive bailouts if they failed, skewing their incentives to take on excessively risky strategies), and are now too big for government takeover.

The question arises: are mergers in this environment a good idea? Look at the trouble Bank of America is in since taking over Merrill Lynch. Is it a good idea to mix good assets with bad? Isn't the lack-of-trust problem we're facing created by the inability of outsiders to tell who is healthy and who is not? The same goes for government regulators -- if the unhealthy assets could be identified they could carved out into a "bad bank" and the virtuous cycle of health and trust in the good banks might be restored.

I ask this in light of this news:

The UAE Government would favour mergers of real estate and financial institutions to create better synergies in the current economic situation, a top government official said.

"We are looking favourably to the merger of real estate and financial companies within the UAE as it would create better synergies," Sultan Bin Saeed Al Mansouri, UAE Minister of Economy, told delegates at a conference in Abu Dhabi on Monday.

His comments come at a time when the country's two biggest mortgage lenders - Amlak and Tamweel - are in the process of a merger, while Emirates Bank and National Bank of Dubai have already merged to create the region's biggest lender.