Tags: Whalen | Big | Banks | Fail

Christopher Whalen: Big Banks Are Going to Fail

Thursday, 02 February 2012 09:19 AM

Big banks will fail because they don't provide the added value that many think, says R. Christopher Whalen, a former banking analyst and now part of the hedge fund Tangent Capital Partners.

"We don’t need to have these behemoths. It’s just a total fallacy," say Whalen, according to the New York Times.

"The big guys are going to break up," adds Whalen, who is setting up an investment fund to focus on small and midsize banks using methodology he created at Institutional Risk Analytics, a research firm he co-founded.

The strongest banks, according to Whalen, are those with no exposure to Wall Street while the biggest ones will face losses from investors, especially from mortgage bets gone bad, the Times adds.

Bank of America, Whalen cites as an example, would be worth more if divvied up and sold into pieces.

Former FDIC chairwoman Sheila Bair agrees.

Proponents of big banks say behemoths are needed to meet the financing needs of big corporations, although big corporations would benefit more from a larger pool of lenders competing for their businesses often with more niche expertise, Bair writes in a Fortune column.

While big banks may lower some costs, they make dealing with management cumbersome as well.

"America is downsizing. Whether it's the food we eat, the cars we drive, or the houses we live in, Americans are concluding that smaller is better. Even U.S. corporations are starting to see the benefit of more Lilliputian institutions," Bair writes.

"At the beginning of the year, Citi's share price was trading at 58 percent of tangible book value, while BofA was trading at 48 percent. If Citi and BofA were broken up into smaller institutions that traded at price to tangible book ratios on par with the average of the big regionals, their shareholders would see $270 billion in appreciation. JPM shareholders would see $52 billion in appreciation," Bair writes, citing as an example of how big banks are worth more broken up.

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