Breaking up Chase: Good for shareholders and taxpayers
May 25, 2012: 5:00 AM ET
Jamie Dimon needs to take a cue from J.P. Morgan's trading debacle and divide the banking giant into manageable pieces.
By Sheila Bair, contributor
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Given the poor shareholder returns, why are these unstable behemoths allowed to exist? There is the perception that the government will not let them fail. Also, their size and complexity protect them from market pressure, and shareholder activists with a mind to break up the big banks are stymied by the megabanks' complex web of thousands of legal entities.
In Washington no one is seriously discussing breaking up the big banks. That said, the best chance of restraining these giants is the hugely important regulatory reform, now being implemented by the FDIC and the Fed, that forces the banks to produce "living wills." These rules require that big banks map their business lines to their legal entities. So, for instance, Chase and others would have to identify the legal entities that support their investment-banking operations, their trading and brokerage activities, their commercial and retail lending, and so forth. The idea is to have a credible breakup plan in place if they get into trouble.
Meaningful enforcement of this rule and public disclosure of the plans would help convince the market that too-big-to-fail is over. It would also help shareholders figure out how to start breaking up the Goliaths.
Yet instead of waiting for the government or shareholders to act, the leadership of these megabanks should take the lead in downsizing. The best way for Dimon to provide a better return to his investors is to recognize that his bank is worth more in smaller, easier-to-manage pieces. Let's face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over. If, by downsizing, Dimon can achieve valuations comparable to the regional banks', he will potentially release tens of billions of value to his shareholders. And rule the roost once again.
This story is from the June 11, 2012 issue of Fortune.
http://finance.fortune.cnn.com/2012/05/25/jp-morgan-chase-breakup/?iid=HP_LN
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