News Journal: Big bank defense crumbling under its own weight

“You can’t break us up. We couldn’t compete internationally.”
“There are synergies among our businesses that we need to remain profitable.”
“We have everything under control. Why are you picking on us?”
When push comes to shove, these are the three main arguments our biggest banks have been using to fight against any new regulations that would reduce their size and the risks they take with federally insured funds.
They were too big to fail back in 2008 when taxpayers bailed them out, and they are even bigger now. That’s because, until very recently, backed by an awesomely effective and expensive lobbying effort, the megabanks were winning those three arguments.
There are signs that may be changing. Not so much in Washington, where the House of Representatives wants to roll back some of the complex, but important, banking reforms put in place by the Dodd-Frank Wall Street Reform Act. I’ll get to that in next week’s column. Surprisingly, the megabanks may be forced to downsize because of pressures within the financial community itself.
“We couldn’t compete internationally” is a hard argument to make after the CEO of Great Britain’s Barclay’s Bank, a top ten international bank with assets of over $2.4 trillion, announced recently that his bank would stop trying to be a “universal bank” and would reduce its size and scope. The Financial Times reported, “The biggest question hanging over Barclays is whether it should spin off its struggling investment bank and focus on the U.K., Africa and its Barclaycard business.” Anthony Jenkins, the CEO, more or less revealed where he plans to take Barclay’s when he said, “Investment banking is a business like any other. It has to earn its return as do all our businesses and we will take whatever actions are necessary to ensure the investment does deliver the returns we seek for our shareholders.”
“There are synergies among our businesses.” Really? That’s not what Richard Ramsden, Goldman Sachs’ leading bank analyst, had to say about JPMorgan Chase. A terrific recent Fortune article by Stephen Gandel quotes Ramsden as concluding that “JPMorgan would be worth 25 percent more if it were split into different pieces” and that “the boost in returns from a split would far out weight the synergies that JPMorgan claims it gets from its current size.”
The kicker in Gandel’s piece is, using the same model as Ramsden applied to JPMorgan, he concludes that breaking Goldman Sachs into three divisions (investment banking, private equity, and asset management) would increase its value by “nearly 18 percent more than its shares are trading at today.”
Goldman Sach’s analyst is a particularly loud voice, but he is hardly the first stock analyst to conclude that the megabanks’ parts are worth more separately than they are as a whole. Sandy Weill, probably the single most important player in the 1990s bank deregulation that led to the rise of the megabanks, now thinks they should be broken up. All it will take is for a few large stockholders to agree, and the private markets may well accomplish what Washington has been reluctant to do.
“We have everything under control.” Oh, come on. Over $150 billion (and still counting) in fines have been levied against the big banks for fraudulent activities leading up to the meltdown. “But we didn’t know,” the CEOs now say. Well, which is it? How do you say “we didn’t know” and “we have everything under control” at the same time? The fact is, managing one of these behemoths is impossible. CEO Jamie Dimon’s comments during JPMorgan’s London Whale fiasco, which cost the bank $6 billion, prove that. He initially misinformed the press by calling it “a tempest in a teapot,” then spent the next year explaining how difficult it is to keep track of everything in an organization as big as JPMorgan.
The new capital requirements proposed by the Federal Reserve in December, as Gandel’s Fortune article pointed out, “make now a good time to consider such a…bank bust up.” By demanding far higher capital requirements for megabanks, which would effectively reduce their profitability, the Fed has definitely told bank stockholders that smaller is better.
As for me, having called without any success for the past six years for a Glass Steagall-like break up of the megabanks, I don’t much care why it happens. I just know that it must if we want to make sure American taxpayers are no longer on the hook for too-big-to-fail bailouts.
Ted Kaufman is a former U.S. Senator from Delaware.