Hey, Sandy? Don’t Break up the Banks!
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I almost choked on my Starbucks last week when I read that Sandy Weill had done an about face and was now advocating the breakup of investment and commercial banking. The economy still hasn’t recovered from the investment banking 2007-2008 meltdown and now it seems Sandy wants to turn back the clock and return to those bad old days.
The idea of merging commercial and investment banking came about as a way to reduce the risks inherent with investment banking. For the most part, it’s worked rather well. JP Morgan Chase (NYSE: JPM) easily absorbed the London Whale billion dollar loss without a taxpayer funded bailout. And although an unintended result of the new and pending legislation has been able to reduce investment banking revenues, it has also helped to limit the banks' risk exposure.
Indeed, the current legislative shackles on investment banking income have served to make it far less attractive. Citibank (NYSE: C), perhaps weary of Morgan Stanley’s (NYSE: MS) weak earnings, a Moody’s downgrade, and the continuing Facebook IPO fallout, just hired Perella Weinberg to appraise Morgan Stanley’s value. Citibank still holds a 49% stake in Morgan Stanley and from all accounts is looking to sell even more of that stake.
Then there’s Bank of America (NYSE: BAC), which must be rethinking the wisdom of its 2009 Merrill Lynch purchase. Bank of America, still grappling with Countrywide Mortgage, continues to see its investment banking arm lose money. Merrill Lynch revenue is down 3.5% this year and last quarter reported a net loss of $1.6 billion as compared to a same quarter 2011 net loss of $1.7 billion. The Merrill Lynch acquisition is costing Bank of America real money and, should these losses continue, may result in the bank voluntarily spinning off or outright selling Merrill Lynch.
The $5.8 billion investment banking loss must have been a sobering reminder to JP Morgan executives of the inherent dangers of investment banking. Although Jamie Dimon said he has no plans to separate commercial and investment banking, a few more London Whale losses might persuade him to change his mind. But Jamie has already informally made the separation by grouping JP Morgan’s major profit centers of investment banking, global corporate banking, and treasury and securities services into an investment bank while combining consumer business, credit cards and mortgages into a commercial bank. Time will tell if Jamie ultimately decides it’s in JP Morgan’s best interests to formally separate the two banks.
If the past is any indication of the future, then spinning off investment banks into separate entities could be setting them up for massive failure. The financial graveyard is still littered with the remains of Bear Stearns, Lehman Brothers and others who got caught on the downside of investment bank trading. Should big banks divest themselves of their investment banks, regulations must continue to be enacted along with third party oversight to help prevent a replay of 2008.
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