This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Breaking Up (a Big Bank) is Hard to Do

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
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $17.48 0.00%
C $54.21 0.00%
GS $190.47 0.00%
JPM $67.17 0.00%
MS $33.78 0.00%


Chart of I:DJI
DOW 17,798.49 -14.90 -0.08%
S&P 500 2,090.11 +1.24 0.06%
NASDAQ 5,127.5250 +11.3820 0.22%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs