Which Bank Will Break Up First?

With the proposal to split up Tyco International(TYC) coming so closely on the heels of one by McGraw Hill Cos(MHP), it seems only a matter of time before one of the giant U.S. financial companies splits itself up.

UBS(UBS) has been under pressure for at least a year to spin off or shutter its investment banking business, and those calls have grown louder in the wake of the bank's announcement that rogue trader Kweku Adoboli caused $2.3 billion in losses.

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See if (C) is in our portfolio

In the U.S., the 1990s and early 2000s were all about creating giant corporations, and more often than not, it seemed, finance was part of the equation. General Electric(GE) and Citigroup(C) couldn't get big enough fast enough. Under the leadership of former CEO Sanford Weill, Citigroup pushed Congress to tear down the depression-era laws that separated insurance, investment banking and commercial banking.Though many industry observers believe those changes helped bring about the financial crisis of 2008, the immediate effect of the crisis was only to accelerate industry consolidation. JPMorgan Chase(JPM), Bank of America(BAC), Wells Fargo(WFC), PNC Financial(PNC) all made major acquisitions since the crisis and U.S. Bancorp (USB) has quietly bulked up through a series of smaller deals.U.S. Bancorp aside, however, most of the other big acquisitions were pushed by regulators concerned about the collapse of the banking system as we know it. Once that was off the table, shrinkage became the fashion. Citigroup created Citi Holdings, a large group of assets it planned to sell or wind down, and Bank of America and General Electric made similar moves. AIG(AIG) strategy has also largely been about selling off assets to repay the government. The only question--one that has led to a great deal of boardroom drama--has been about the timing of the sales.Still, BofA, GE and Citi remain among the largest companies in the world, and they are still by and large in the same businesses they were in before. Of the three, Bank of America has struggled the most over the past year, and calls for it to sell off Merrill Lynch have grown louder. However, the bank has maintained it has no such intention, and a recent management restructuring appeared to make such a move even less likely. While GE initially got lots of pressure to get rid of its financial unit, those calls appear to have died down of late.

Another interesting case is Goldman Sachs(GS). There has been talk of Goldman splitting up its trading and investment banking operations. Goldman has been a trader-driven firm for at least the past decade, and many argue conflicts between trading and investment banking are responsible for much of the political hot water the company has been in since the crisis.

JPMorgan would seem to be the most unlikely U.S. financial to break itself up. It is one of the least troubled, and has consistently expressed an interest in growing. But CEO Jamie Dimon appears very frustrated with the regulatory environment. He has a strong personality, and many would describe him as a visionary. Will he surprise us all by being the first to radically rethink the financial supermarket model pioneered by his former mentor, Sandy Weill? Dimon's career has to a large extent been defined by the relationship to Weill. After being unceremoniously pushed out by his former boss, Dimon eventually worked his way back to the top of the banking industry.

Certainly the first giant U.S. financial corporation to split itself up would find its smaller units in a better position to sell itself to Congress, regulators and the public. Few refrains are stronger or more consistent these days on the political left than "break up the banks." Shareholders might also get excited about a smaller bank, since growth prospects would seem to be better.The counterargument is that, large as U.S. banks may be, they are not nearly as large, relative to the U.S. economy, than big banks in the rest of the world. If the U.S. breaks up its banks, goes this counterargument, it will soon see its banking system controlled by megabanks in other countries. What do you think? Will the current system of U.S. megabanks survive? -- .

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