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Break Up the Banks? Not Likely to Hurt Your Portfolio

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An interesting thing is happening to the banks on Capitol Hill. Senators Sherrod Brown (D-OH) and David Vitter (R-LA) just managed to push through some legislation aimed at studying controlling the size of banks. The goal is to end the entire concept of 'too big to fail,' the notion that some banks are so large that to see them go under would hurt the overall economy and lead to another financial meltdown.

The idea rests on the belief – which I am not vetting here – that banks that large are essentially being subsidized by the federal government. Because they have an implicit guarantor of a bailout, they can borrow money cheaper than smaller banks, Brown believes it to be 50 to 80 basis points, and that they are encouraged to take greater risks than smaller banks because their boards know there will be no catastrophic consequences.

I've heard various levels of holdings in the legislation and discussions. Brown and his allies (and he has them in both parties) are floating anywhere from $200 billion to $500 billion in total assets before a bank must get broken up. This would come as a hell of a shock to one of the big banks, I admit. It's also unlikely to happen. Even with the Senate unanimously passing a bill requiring the Government Accountability Office to examine in what ways these banks benefit from such subsidies, I'm doubtful anything could pass our fractured House of Representatives.

Still, it leads one to think about big banks and their investment worthiness. Or it should, anyway.

JPMorgan Chase (NYSE: JPM)

Chase most recently made the news last summer when CEO Jamie Dimon had to testify before the Senate Banking Committee about the banks enormous trading loss in a play designed to limit risk. Even with a loss of billions of dollars, Chase is so big that it shrugged it off and passed Wells Fargo as the most countries most valuable bank. A Senate probe is never a good thing, but Dimon did well and it hasn't seemed to negatively impact the bank's shares any. Since a low spot in June the share price has risen 56.8% and it has maintained it's dividend of 2.47%. It's P/E of 9.35 is low enough to at least hint that investors might think it's a bit overpriced but I think it's still got some growth to work through.

Bank of America (NYSE: BAC)

Bank of America's stock has been flat for a month or so right now. It's way too soon to call it a troubled organization but it has had its share of public relations issues over the last year with the Countrywide settlement reminding everyone of the firm's participation in, and profit from, the subprime mess and earlier the move to start charging for debit card use (since backed off). Still, note the fact that the firm's share price is up about 50% since May. I think BoA truly is one of the banks that's getting support by an implicit too big to fail subsidy. I wouldn't invest in them now until someone shows me that management knows what the hell they're doing.

Citigroup (NYSE: C)

The market is showing some less-than-enthusiasm about Citi lately. Options traders beat it up this week with puts taking the bet that the stock is dropping in the short term and I think there's a similar long-term belief, too. One analyst even referred to Citi as a “used Kia.” Ouch. Overall the stock has seen growth this year, up nearly 72% since the summer trough but there's still a lot of doubt out there about Citi. For non-institutional investors, I'd give it a 'Stay Away' for now. Let them prove themselves, first.

Wells Fargo (NYSE: WFC)

Almost everyone seems to like Wells Fargo. Well, not quite everyone. But most. Like Chase, WFC seemed to come out of the financial crisis in good shape. Recent forecasts look for more growth for the firm, too. This is the sort of bank Brown's legislation is designed to hammer and limit. Like the others on this list, Wells Fargo saw a drop last summer, but not as much as the rest of them. Because of its expected strength, though, it hasn't grown as much, only growing about 10% of so since June. It does offer the best dividend yield at 2.87%, though. That part's good. In short, WFC is probably the most secure of the banks in this column, but also the one with the least growth potential. Still, there are much worse places to put your money.

Look, big banks are generally a safe place to put your money. It's foolish to expect runaway crazy growth from them long-term, but they're big enough that growth should be there. Senator Brown's efforts to control them are very unlikely to come to fruition anytime soon, but I know Brown: he'll keep trying. So invest in a few of these if you have the money. But keep an eye on the legislative process. Heck, that's a good idea for any investor.  But if the banks are spun off, it'll be a sign of an increasing aggressive regulatory environment.  It'll also mean that the smaller banks will have high expenses and therefore less profitability.  So be careful.

Good luck!

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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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