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Once Unthinkable, Breakup of Big Banks Now Seems Feasible

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What was made can be unmade.

JPMorgan Chase and Wells Fargo may have venerable names, but they and the pseudo-venerable Citigroup and Bank of America are all products of countless mergers and agglomerations.

There is no rule of markets that requires a financial system dominated by four cobbled-together, lumbering behemoths.

Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors?

Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable.

Bank of America’s recent quarterly earnings were so weak that investors and commentators wondered whether the bank should sell off Merrill Lynch, the investment bank for which it foolishly overpaid at the height of the crisis. Bank of America trades at half of its book value (the stated value of its assets minus its liabilities), an indication that investors view its asset quality and prospects just a notch below abominable, as Jonathan Weil of Bloomberg News pointed out last week.

For Bank of America, the question is whether it will have to raise capital. Selling shares at such depressed prices would be costly. Regulators won’t push for it. They just gave stress tests to the biggest banks and merely restricted the bank from paying out a dividend. The logical solution is that Bank of America shed business lines in a bid to improve its prospects in the eyes of Wall Street.

Citigroup’s stock, revenue and earnings have lagged for a decade.

“Look, if you can’t compete in the major leagues for over a decade, it’s time to go back to the minors,” said the always outspoken Mike Mayo, an analyst with CLSA. His chronicle of ruffling bank management feathers, “Exile on Wall Street” (Wiley), will be published in the fall.

JPMorgan Chase is as well managed as any gargantuan bank can be. But if you look at its businesses, it’s hard to see any area where it is clearly the best, something even its own executives concede. Not in credit cards, where the premier name is American Express. Not in money management, where you might offer up T. Rowe Price. Investment banking—Goldman Sachs (the last quarter notwithstanding). Back-office transactions, State Street.

Yet even JPMorgan is merely trading at book value. Put another way, the market regards the value that JPMorgan provides as a financial services conglomerate as zilch. How well do all of JPMorgan’s divisions work together? In presentations to investors, JPMorgan executives show how much revenue they gain from existing clients. But these measures are hardly unbiased. Executives have an incentive to defend their empires. Who is to say that a certain division of JPMorgan wouldn’t have won that business anyway? And nobody measures how much a bank loses through conflicts of interest.

Even in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay.

“The biggest motivation for not breaking up is that top managers would earn less,” Mayo said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.”

Institutional investors—the major owners of the banks—are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target.

Also, there are reasons to think that smaller banks wouldn’t necessarily make the system safer. A wave of small bank failures can have systemic effects, as was the case in the Great Depression. Focused companies like Washington Mutual and Bear Stearns failed in the recent crisis, worsening it.

Making a nuanced argument, John Hempton, a blogger, investor and former regulator in Australia, says that it’s better for shareholders—and societies—to have large banks with lots of market power. That makes them more profitable and leads them to take less risk, making them safer and more enticing for investors.

Another oft-trotted-out argument against breakups: The United States needs global banks to service its giant, multinational corporations and to preserve our position in world markets.

Color me unconvinced. When a giant corporation wants to do a major bond offering or a big company goes public, the banks, despite their size, don’t want to shoulder all the risk themselves, preferring to share the responsibility.

If the stocks continue to lag for quarters upon years, these arguments will seem less convincing, while institutional reluctance will begin to erode.

Investors don’t care about size, they care about performance. It’s undeniable that smaller banks are easier to manage. And they are easier for regulators to unwind—and therefore less terrifying to trading partners—when they fail.

One of the most remarkable aspects of the debate about overhauling the financial system after the great crisis was the absence of serious contemplation of breaking up the largest banks.

It’s not a perfect solution. Banks responding to investor pressure would react haphazardly. But it’s a good start.

But if you break them up, how can they lobby for bailouts to be used to loan back the taxpayers supporting them at interest?  How can they file fraudulent paperwork to foreclose on people?

This is disgusting.

Golman and JP Morgan were investment firms and crowned bank status by Bush and Company in order to get into the federal reserve’s vault.

They have reported in giving HUMONGOUS BONUSES.

Joseph Zernik, Human Rights Alert (NGO)

July 28, 2011, 3:01 p.m.

This proposal is naive at best… You are talking about breaking up crime organizations.

Joseph Zernik, PhD
Human Rights Alert (NGO)
____
LINKS:

[1] 10-05-05 Countrywide, Bank of America [NYSE;BAC], and its President Brian Moynihan Compilation of Records Evidence of Racketeering
http://www.scribd.com/doc/30975368/
[2] 10-05-05 Chairs of US Congress Committees of the Judiciary and Banking Are Requested to Join Senator Feinstein’s Inquiries on Comptroller of the Currency
http://www.scribd.com/doc/30979882/
[3] 10-07-06 Complaint Filed with US Attorney Office Los Angeles Against Moynihan Bank of America [NYSE:BAC] Bryan Cave LLP Alleging Racketeering
http://www.scribd.com/doc/33971099/
[4] 10-07-06 Complaint Filed with US Attorney Office, Los Angeles, Against Brian Moynihan, Bank of America [NYSE:BAC], Bryan Cave LLP, Alleging Racketeering and Large Scale Financial Institution Fraud
http://www.scribd.com/doc/33971099/

CLARENCE SWINNEY

July 28, 2011, 3:57 p.m.

Breakup a MUST. A monopoly.
5 own 50% of 7600 Bank deposits
10 own 80%  m o n o p o l y
Bush gift to them by changing Fannie Maximum loan $300,000 to $729,000.
Bush gift to them with Bankruptcy Law
Bush gift to them with FDIC coverage $100,000 to $250,000

Imagine how much less Bailouts would have been had Fannie Max kept at $300,000????  Bank deposit maximun $100,000?

Bailout costs now up to $14,000 bIllion Yes! Yes!
Did you hear those money printing presses purring?
Banking must go back to LOCAL.
Local Investors loan and make a profit
Money velocity is in a local county not all over the world

This happened since 1980——
5% own 63% all Wealth
2% own 50% Financial Wealth
Top 50% take 87% al income
Bottom 50% get—wow wow lets party—- 13%

Democracy?? You kidding? No way. Corpocracy.

Please get us another 6 years of Total Republican Control. Please
We rich want that 7%. 87% of income! Ha! we want 95%.
We own all Military Industrial Economy. XXXX you idiots start some wars
Help us get that 7% and 95%  It shalt Trickle Down to `120,000,00 po lil workers with stagnated income amd help them get ahead.

Help the poor. I cannot recall who said that.
Olduglymeanhonest
Oh! Mohammed said it
Oh! Osama Bin Laden said it.
Oh! Martin Luther King said it
Oh! Reverend George Washington Swinney said it..
Dad always knew best.

AMERICA THE LAND OF THE XXXXX YOU NAME IT

Peter Anderson

July 28, 2011, 3:58 p.m.

Geithner may have become impossibly enamored of the Big Banks he socialized with at the NY Fed. But didn’t anyone in the Administration ask during the throes of the Great Meltdown in 2009 whether it would be less costly in the present, and far more salutary in the future, to use those hundreds of billions in bail-out funds to build up the second tier regional banks to step up on the national stage to maintain liquidity, instead of bailing out the Big Banks, who were the very institutions primarily responsible for destroying the economy and, for three years now, putting millions out of work in unheralded despair.

  Presumably someone (Geithner?) argued that the mid-sized banks wouldn’t have been able to restore loan books fast enough, and we had not choice but to feed the hand that bit us.

  That’s a hoot. Having been rewarded for the greatest malfeasance of the century, the Big Banks effectively closed their loan windows without any sanction or disapprobation because the Treasury, more worried about convincing the banks to take the funds that they needed to survive, somehow forgot (?) to condition the bail out money on reciprocity.

  Were Wall Street itself to break the Big Banks in the end, after Republicans and Democrats ducked under the desks when the specter of dismemberment was raised, now THAT would be the ultimate just deserts. Oh but for someone to disinter FDR, Ben Cohen and Hugo Black, who were responsible for breaking up the giant utility holding companies in the 1930s, so we might restore some backbone to our invertebrate leaders today.

The only problem with this was the one pointed out by Berle and Means back in 1933—THE STOCKHOLDERS - aka the owners—DON’T RUN THE CORPORATIONS. Paying executives in stock options was supposed to address this agency issue. Instead, the execs had captive boards of directors structure them in such a way as to make them just another way of management acting against the interests of the owners. While a nice thought, I’m not gonna hold my breath waiting for this to happen

The major banks did take ruinous risks in housing, just as the rest of Wall Street did, which is one of the reasons we have such a housing disaster and the reason I took most of my money out of B of A and put it in a local credit union.  I’m tired of the biggies gambling with my money.

Glass Steagall would be the first step to reducing corruption in our banks.

Smaller banks excite less greed.

US banks are sub-prime lending in australia, nz, and other places.
g e money was involved in a NZ property scheme that collapsed, ruining some middle class investors,

It is my understanding that the government failed to put certain limits on the bailout funds to the big banks; i.e., only allowing them to use the money to help people with loan modifications, etc.  Instead, the banks “pocketed” the bailout funds, used them to pay huge bonuses to their executives, and failed to American public who funded the bailouts to begin with!  We have our government to blame for basically “handing over” free money to the banks without specific rules for how it could be used!!  It doesn’t matter that most banks have paid it back….the American public did NOT get what they paid for!

The Big 4 don’t need to have their core deposit and lending roles broken up. I like being able to travel around the country and have free access to my account at ATMs. But they should be stripped of much or all of their trading activity that is empowered now by their federally insured deposits.

Remember the Golden Age? Remember the ensuring Depression? Remember Glass-Steagall? One good reason for studying history is to give the present a chance. That is, when we’re lucky enough to have anyone at all in power who wants to give the present a chance.

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)