Big Bank Break-Up is Anti-American: Bove

NEW YORK ( TheStreet) -- Talk of breaking up the big banks is resurfacing again, but Rochdale Securities analyst Richard Bove thinks doing so will be a major threat to the country's financial sovereignty.

In fact, the analyst makes a case for making big banks bigger. "The United States needs much bigger banks to protect its position in the global financial system," Bove argued in a note on Monday.

Earlier this morning, KBW published a report noting that bank break-ups might be inevitable. "At some point in the future, we would expect the current cycle to include public debate on the reduction in financial services and cuts in subsidies, particularly to Fannie Mae and Freddie Mac. We believe that the historical analysis suggests that investors should be prepared for the possible eventual break-up of the largest financials, including Bank of America, Citigroup and JPMorgan," the report said.

Regulators from Dallas Federal Reserve Chair Richard Fisher and former FDIC Chair Sheila Bair have been arguing that big banks threaten the stability of the economy and have been pushing for their breakup into smaller more focused banks.

But Bove seems to subscribe to JPMorgan Chase ( JPM) CEO Jamie Dimon's views that many of the rules being framed puts U.S. banks at a serious disadvantage to foreign players.

One trend that troubles Bove is the growing use of foreign banks as primary dealers. The U.S. Treasury now uses two foreign banks for every U.S. bank as primary dealers to raise funds. "Personally, I think this is very dangerous. If the country wants to get away from dependence on foreign oil think how much more important it is to get away from dependence on foreign money," he wrote in a note.

A break-up of American banks might also eventually lead to the dollar losing its position as the world's reserve currency, something that gold bugs already believe is a foregone conclusion. But Bove argues that American banks need to remain a dominant force in the international scene in order to facilitate the use of the currency.

"There are more Yen, Yuan and Euros, each, than dollars. If American banks fade internationally, as the United States continues to attack them vigorously, how long will it take for the foreign banks, who are being aided by their governments, to replace the dollar as the reserve currency?"

And for those arguing that banks's parts might be worth more than the whole, Bove says they fail to truly evaluate the soundness of a monoline financial company or the benefits of a diversified business model.

"If monoline companies had a superior business model to the big financial conglomerates, why are there so few of them? he continues. "Is it possible that monoline financial companies flare up and then disappear because they have an inferior business model?"

The analyst points out that monolines have not tended to survive cycles whereas diversity has protected banks in cyclical downturns. Moreover, scale may be the one critical element in a largely commodity business where banks have neither control of interest rates nor the economic environment in which it sells products, the analyst argued.

--Written by Shanthi Bharatwaj in New York

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