(Corrects spelling of Robert Bostrom's name beginning in 13th
* Top Wall St executives disagree with Weill
* JPM ex-CEO Harrison: 'I don't buy that'
* Citi, others have studied breakups in the past
* Bankers say being big has many benefits
By Lauren Tara LaCapra, Rick Rothacker and David Henry
July 27 Sandy Weill has a lot of convincing to
The former Citigroup Inc CEO, who was in many ways the
architect of the "too big to fail" giant bank system, dropped a
bombshell on Wall Street on Wednesday by proposing that
universal banks should be broken up because they are too big and
complex to manage. [ID: nL2E8IP6F1]
But the idea is hardly resonating with top bankers and
dealmakers of the past 20 years.
"I don't buy it," said William Harrison, who was succeeded
by Jamie Dimon as chairman and CEO of JPMorgan Chase & Co
. "It gets back to management and risk-taking, and you
can screw that up at a small bank or a large bank."
Harrison, a Weill contemporary who was instrumental in
building JPMorgan into the largest U.S. bank, said in an
interview on Thursday that he would hate to see the anger toward
bankers lead to a breakup of big banks and the efficiencies they
bring to the U.S. financial system.
Other Wall Street sources said the idea is also not new.
During the financial crisis, for example, U.S. regulators
asked Citigroup to do an analysis about whether it would make
sense to separate its commercial and investment banking
operations, a source familiar with the situation said.
But consulting firm Bain & Co, which was hired by Citigroup
to do a study, concluded that tax considerations made a breakup
inefficient, the source said.
The report, which was kept hush-hush due to the sensitivity
of the matter, was not widely circulated even internally at the
bank. It couldn't be learned what exactly the tax implications
would have been.
Citigroup declined to comment. A Bain spokeswoman and Weill
did not respond to requests for comment in time for publication.
Since the crisis many other major U.S. banks have also
studied whether breaking up would be a good idea, Wall Street
sources said, but have decided to remain in one piece.
Nevertheless, the about-face by Weill has sparked fresh
debate about whether big banks should indeed be broken up. A
breakup of any of the top Wall Street banks could have
far-reaching consequences for investors, corporations, capital
markets and consumers.
"Most big bank executives are not in favor of breaking up,
and in fact are in violent opposition to it," said Robert
Bostrom, a partner at the law firm SNR Denton who was general
counsel of housing finance giant Freddie Mac from 2006
until last year.
"I'm not personally convinced that size equals trouble or
that size plus activities equals trouble," Bostrom added. "The
financial crisis was a 200-year event in the making that would
have happened regardless of how big the banks were."
BENEFITS OF BEING BIG
Several Wall Street executives said being big brings many
advantages, and pointed to the benefit of having the kind of
diverse revenue streams that allowed JPMorgan to absorb major
losses from bad bets in its trading business last quarter while
still earning money overall.
"Having lived through the 80s and 90s, the reason there was
this consolidation in the industry was really because the bigger
your balance sheet, the more business you could do," said Peter
Vinella, a director at consulting firm Berkeley Research Group.
Vinella, who has helped develop business strategy plans for
giant banks since the financial crisis, worked for Dimon and sat
in on meetings with Weill when they were all at Citigroup.
Wall Street executives and advisers argued that U.S. banks
have to be big and diverse to compete with large European, Asian
and Latin American competitors.
Clients also like the wide range of talent and services that
they can bring to the table.
"People around the world, like me, for example, need the
services of these big integrated investment banks," said the
founder of a major private equity firm. "If you try to go
backwards, commercial customers will have less access to less
good service, with less good prices."
'UNSCRAMBLING THE EGG'
Not everyone agrees. Some experts say a breakup makes
sense, especially when considering the values investors are
assigning to financial supermarkets compared with rivals that
have largely stuck to their knitting.
Shares of Citigroup, Bank of America Corp and
JPMorgan trade at less than 8 times 12-month earnings, whereas
Wells Fargo & Co and US Bancorp trade at 11 and
12 times earnings, respectively.
Mike Mayo, a bank analyst with CLSA, says he believes Morgan
Stanley shares would be worth $32 apiece if the bank were
split up into three standalone businesses in securities, wealth
management and asset management. Morgan Stanley shares have been
trading only around $13, less than half of its tangible book
value per share at June 30.
Executives and bankers are stumped by certain questions in
such a breakup analysis. For instance, how would a standalone
investment bank or its clients be in a better position without
access to funding that comes from being part of a diversified
company? And what about the costs of untangling integrated
systems, some of which were only melded together at a great
expense in the past few years?
One former top banking executive, who declined to be named,
said "unscrambling the egg" is one of the main difficulties in a
breakup scenario - especially when functions like lending to
large companies, treasury management and underwriting debt are
Richard Kovacevich, who retired as CEO of Wells Fargo at the
end of 2009, told Reuters that he also did not agree with
Weill's recommendation, made on Wednesday in a CNBC interview.
"There is this conventional wisdom that big is bad or
risky," he said. "I don't think there is any evidence that that
is the case. Banks fail mainly because of concentration of
The idea advocated by Weill and other "too big to fail"
critics would imply a return to a Depression-era rules known as
Glass-Steagall, which separated investment banks from banks that
took deposits and made traditional loans.
Peter Hagan, a director of Allied Irish Banks and
former chairman of Merrill Lynch's U.S. banks, said the ability
to trade securities helps a bank manage its own risk and provide
risk management services to clients.
Instead of returning to Glass-Steagall, regulators could
build in incentives for the industry to deconsolidate on its own
and reduce risk. One idea could be to create incentives such as
more attractive capital rules for smaller institutions, which
could make them more profitable and encourage managements of
large banks to break into smaller pieces, he said.
"The point is if you get them down to a reasonable size,
where they are not too big to fail, you then have the ability to
manage the situation if one of them gets somewhat out of line,"
Some banks have been getting smaller. Citigroup, for
example, has sold more than 60 businesses and $600 billion in
assets since determining in 2009 that about 40 percent of its
balance sheet was no longer necessary for its banking operation.
Many bankers say what is most likely to happen is that big
banks will continue to shed some parts of their businesses and
strengthen their balance sheets -- but that there is no 'big
bang' series of break ups.
"We need a good discussion about how these institutions
might be simplified and much better regulated," said Bill Isaac,
former chairman of the Federal Deposit Insurance Corp, who is
now global head of financial institutions at FTI Consulting and
sits on the board of Fifth Third Bancorp. Isaac does
not advocate a return to Glass-Steagall.
With clamor growing for a solution in the United States,
some believe regulators may find a way to enforce even stricter
"It's possible that the government would impose a
Glass-Steagall type structure, especially if there's another
blowup," said one Wall Street source.
But, he added, "I doubt any bank would voluntarily do it."
(Additional reporting by Dan Wilchins; Writing by Paritosh
Bansal; Editing by Martin Howell and Muralikumar Anantharaman)