Tags: Meredith | Whitney | split-up | Banks

Meredith Whitney: Don't Rush to Split Up Big Banks

Wednesday, 25 July 2012 05:36 PM

Calls to split up big banks are growing, even from big-bank architect Sandy Weill, a former Citi chairman, but in reality, any such downsizing will take a long time and there's no need for "draconian" measures to speed up the process, says star Wall Street analyst Meredith Whitney.

Earlier Wednesday, Weill said big banks need to be broken up due to the systemic risk their potential collapses would pose on taxpayers and depositors.

Splitting up big banks may happen, but over time, as the banks must find a way to keep the more profitable areas of their businesses, which in reality, aren't all that big.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

"I think it's steadily in the process of being split but you don't have to have a draconian move when you break up the banks. It's very clear where the profitability is coming from and it's very clear that the banks are at the initial stages of getting to where they need to go," Whitney told CNBC, pointing out that profitable banking operations are high-fee, low capital-intensive areas of the business.

"If you look at the cash management, the global transaction services of Citi and JPMorgan, those are great businesses but they happen to be small businesses at most under 15 percent of the total businesses," Whitney said.

"The asset management business is great business, these are both annuity-style businesses, high-fee, low-capital intensive businesses."

Many banks have put all of their eggs into the capital markets side of operations with the aim of generating more resources to originate more products like consumer loans.

"That model is broken but that's where the bulk of the infrastructure is. It's nice to say the big banks should be broken up. It's very expensive to do so, which is why you see the big banks trading at such deep discounts," Whitney added.

Big banks in today's sense were born in the 1990s with the repeal of the Glass-Steagall Act, which separated investment banking and commercial banking for most of the twentieth century.

With the law's repeal, investment banks and commercial banks grew under one roof and in the process, destroyed the pricing structure of the products they sold.

"Pricing on every product, from a mortgage to a home-equity loan to a credit card was eviscerated with the idea that they could make money on the other side through securitizing their products — this aggregate would make more money. And the fact is the aggregate has completely destroyed the pricing model for financial services," Whitney said.

Regional banks can step it up to restore pricing for those financial products, Whitney added.

Weill, who designed so-called supermarket banking, said earlier that too much leverage and not enough transparency these days call for a return for a separation of investment and commercial banking.

“What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Weill told CNBC earlier.

Other noted financial industry leaders have pointed out that big banks should be broken up, including Sheila Bair, former head of the Federal Deposit Insurance Corporation.

Big banks haven't created as much value for shareholders than once thought.

"Whatever economies the megabanks achieve from their size are more than offset by the challenges in managing trillion-dollar institutions that are into trading, market making, investment banking, derivatives, and insurance, in addition to the core business of taking deposits and making loans," Sheila Bair, former head of the Federal Deposit Insurance Corporation, wrote in a recent Fortune column.

"This is one of the reasons why, even before the crisis, their shares performed more poorly than those of the well-managed regional banks, and continue to do so."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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Wednesday, 25 July 2012 05:36 PM
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