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Breaking Up (a Big Bank) is Hard to Do

Stocks in this article: CJPMBACMSGS

In the prospective breakups of UBS, Credit Suisse, Barclays - or even Citigroup or Bank of America -- Smith notes that investment banks would likely transfer significant assets to the balance sheets of their deposit-taking parents and look for independent investors to fund a spinoff. "This has been done in the past when American Express broke off Lehman Brothers," says Smith.

Operational change would also likely engender structural change, notes Smith who points to the change in investment banking business models from intermediating and advising risk -- to taking and storing it, by way of asset securitizations and writing derivative products. Since roughly the same time as the breakup of Glass-Steagall, Goldman Sachs, for instance, has roughly quadrupled its assets. Interestingly, since the firm's 1999 initial public offering, revenue has only roughly doubled and profits have grown by an even smaller measure.

Meanwhile, a hindrance to such breakup efforts, ironically, may be new regulations that seek to solve 'too big to fail' banks. Many bank chief executives, highlighted by Jamie Dimon of JPMorgan, argue to shareholders that once regulations are completed and executed upon, financial sector investors will be more supportive of the universal bank model -- eventually benefitting from diversification.

Recently, the nation's largest banks have submitted, and with the exception of Citigroup, passed Federal Reserve stress tests to their capital and assets, in a check up on their soundness that's seen as a way to prevent future crisis and bailouts. Universal banks - deemed by the Fed to be 'systemically important financial institutions' - also recently sent regulators living wills that outline their plans to sell assets and weather a financial crisis. New Dodd Frank Act regulations of derivative trading and prohibitions on proprietary investments also take effect, in coming quarters.

Still, in spite of these new post-crisis rules, the likes of Dimon argue that global businesses and customers require global investment and commercial banks.

Amid a financial sector rethink that may actually metastasize quicker in Europe, those hoping to see an end to 'too big to fail' may be smart to pin their hopes on common shareholders, over regulators, politicians or ex-CEO's like Weill, who may have a change of heart.

" The forces of economic gravity are just so overwhelming," notes NYU's Smith of an end to 'too big to fail' and bank earnings that struggle to eclipse the capital costs.

"It won't happen next month or next year. Five years from now it will happen," says FBR Capital Markets' Miller of bank breakups. In a world of broken up banks, it is the deposit-taking lenders that Miller says will likely appeal to investors. "Just look at where Wells Fargo is trading relative to the broker dealers," he adds.

For more on the contrasts between U.S. bank earnings and business models, see why Warren Buffet shuns investment banks. See why Barclays' scandal was born out of a derivatives bet for more on Libor litigation.

-- Written by Antoine Gara in New York

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