Obama Plan Favors Goldman, Wells Fargo

NEW YORK ( TheStreet) -- If the country's biggest banks had only the business lines that President Obama would prefer they keep, it would have taken taxpayers a lot longer to get their money back.

The president last week proposed a plan that would effectively force banks to slice off portions of their companies that in engage in capital markets activities. Instead, banks would go back to being plain-vanilla banks -- the type that take in deposits and issue loans, and give customers advice on how to make money.

But while the equity and bond markets have improved dramatically since the crisis erupted, the economy is faring much worse. About 160 of those plain-vanilla savings & loans have collapsed since September 2008, and there are over 550 more of them on the Federal Deposit Insurance Corp.'s "problem" list.

Taking a simple look at Bank of America's ( BAC) business line results last year tells the story fairly well. The only segments that operated in the black were those related to capital markets, as well as deposits. The most profitable segment happened to be global markets, which raked in a net $7.2 billion.

If Bank of America only consisted of consumer-servicing businesses -- deposits, credit cards, mortgages and wealth management -- it would have lost $4.3 billion in 2009. Instead, it earned $6.3 billion.

Of course it's difficult to tell whether all of the profit in any given segment excludes the type of business Obama would like to strip out of the banking industry. They aren't required or expected to report results in that fashion today. But the story appears similar across other large firms, perhaps with the exception of Wells Fargo ( WFC), most of whose business is related to client services, rather than investment banking, hedge fund and private equity, or proprietary trading.

Looking at pro-forma-ish Citicorp -- the portion of Citigroup ( C) that management plans to keep rather than sell or wind down -- its regional consumer banking line accounted for just $1.9 billion, or 12%, of its $14.8 billion in income from continuing operations. If one were to strip out JPMorgan Chase's ( JPM) investment banking and corporate and private equity lines, it would have earned $1.8 billion, rather than $11.7 billion, in 2009.

There's no telling how the Obama proposal will turn out. It may have been more a political tactic than a legitimate proposal, fueling doubt about its viability. But as it stands, the winner in all of this, once again, may be Goldman Sachs ( GS).

Goldman became a bank holding company last year to avail itself of bailout programs and access cheap funding from the Federal Reserve. But a pittance of its business comes from traditional banking.

There's little chance regulators would force Goldman to divest itself of all business lines that are strictly related to profiting from the capital markets. In effect, that would be asking Goldman to divest itself of Goldman. If the firm simply reversed course and became an investment bank again, like boutique competitors Lazard ( LAZ) and Evercore ( EVR), it could emerge scot-free from the regulatory tumult.

The same is true for heavyweight competitor Morgan Stanley ( MS). Such a move would derail Morgan's earlier plans to boost its consumer business lines, which were outlined shortly after changing its status to a bank. But with new management in place and a different market environment, those plans may have been derailed already on their own.

Tackling "too big to fail" will be a difficult task for the Obama administration. It is now responding to the problem by changing the dialogue from "too big" to "too diverse," neither of which were actually the problems to begin with. There's no simple solution, because the issues are more complex than politicians would like them to be.

Some food for thought: How would the market have responded if 10 firms one-tenth the size of Lehman Brothers filed for bankruptcy on Sept. 15, 2008, or four large thrifts a quarter the size of Washington Mutual were seized on Sept. 25, 2008? Both those companies were largely one-trick ponies of different business lines. They still collapsed, as did Bear Stearns, and as would have Fannie Mae ( FNM) and Freddie Mac ( FRE) without extensive government support.

There's some truth to executives' statements that having diverse businesses allows a bank to get through downturns more effectively. Most of the time, it's a downturn in one or two segments, not an unprecedented collapse of the financial industry. The widespread extensive domino effect has taken place because mortgage-related problems were spread throughout every business line, regardless of a firm's size and shape.

-- Written by Lauren Tara LaCapra in New York

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