Bankers Agree: 'Too Big to Fail' Has Failed

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Citigroup - Too Big To Fail
Maybe if we called it "2B2F," it would have been more popular. But lacking the street cred of a cool nickname, the idea "too big to fail" is beginning to lose popularity in America.

Just a few days ago, former Citigroup (C) CEO Sandy Weill -- architect of the 1999 repeal of the Glass-Steagall Act -- publicly voiced the opinion that certain banks needed to be broken up. As we've all seen in recent years, the merger of commercial banks with investment banks to form 2B2F megabanks was fraught with peril. A few bad trades and -- poof! -- suddenly the deposits of ordinary investors were at risk.

Weill's solution: "They [should] be broken up so that the taxpayer will never be at risk, the depositors won't be at risk."

That's kind of funny, coming from the guy who helped to create the risk in the first place. But according to Weill, things have gotten out of hand. It's time to "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 'too big to fail.'"

It's an idea that's starting to gain currency on Wall Street.

The Tide Turns

Just listen to what some people on the Street are saying:
  • Richard Kovacevich, former CEO of Wells Fargo (WFC): "Investment banks ... and commercial banks ... become risky when there is a large proprietary trading. ... This is the activity in which danger lurks, and it should be strictly limited and regulated. We should not put our economy at risk again."
  • Thomas Michaud, current CEO of Keefe Bruyette & Woods: Citi, Bank of America (BAC), JPMorgan (JPM), and Wells "are the biggest banks in the nation and I think that's unsustainable. Either the banks' performance has to get better or ... they're going to have to" break up the banks.
  • Mike Mayo, analyst at CLSA: "This is not a tough call. If you break up the big banks ... I think investors would be huge winners."
  • Philip Purcell: former Morgan Stanley (MS) CEO: "From a shareholder point of view, it's crystal-clear these enterprises are worth more broken up than they are together."
  • Sheila Bair, former FDIC chairwoman: "At the beginning of the year ... [Citigroup] was trading at 58% of tangible book value, while BofA was trading at 48%. If Citi and BofA were broken up into smaller institutions ... their shareholders would see $270 billion in appreciation."
'Too Big' is 'Just Right'

That's some serious moola Bair is talking about. The kind of money that makes even folks who oppose the idea give it serious consideration.

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The Wall Street Journal says that in 2010 and 2011, Bank of America executives considered breaking up their own empire... before ultimately deciding against it. And even some folks like Wells Fargo's Kovacevich (who, believe it or not, actually argues against breaking up the banks) admit there's danger inherent in "too big to fail."

As for banking executives who insist that "too big" is "just right," their arguments generally parrot those of JPMorgan CEO Jamie Dimon: "Size matters. The diversity of JPMorgan and the size of it is what gives it its strength." To Dimon's way of thinking, it wasn't the megabanks that got in trouble during the last crisis. It was the "smaller" banks that were "less diversified" that failed.

When You're Right, You're Right ... Except When You're Also Wrong

He's right about that. According to FDIC, 92 banks failed last year. True, most of these were small fry. Tiny banks you've probably never heard of. Banks with names like Badger State Bank, the aspirational Park Avenue Bank, and Superior Bank of Birmingham (which turned out to be anything but).

In 2010, 157 more banks died a quiet death -- RockBridge Commercial, American Marine, and Appalachian Community Bank.

A year before that, the tally was 140. Banks with names like Ocala National, Great Basin Bank, and -- I kid you not -- Corn Belt Bank & Trust.

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Bankers Agree: 'Too Big to Fail' Has Failed

BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.

By 24/7 Wall St.

Photo: Les Stockton,

KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.

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PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).

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M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.

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Photo: Afagen, Flickr

U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.

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Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.

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Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.

By 24/7 Wall St.

On the other hand, the mere fact that you've never heard of Corn Belt Bank & Trust did lend one assurance: Alone or all together, these tiny banks weren't of sufficient size to bring down the economy when they failed.

But a big bank like Citigroup or JPMorgan ... or Countrywide or Lehman Brothers? That's a badger of a different color, friends. That's a mortal threat to the system. And it's a good reason to break up the 2B2F banks.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services formerly recommended JPMorgan Chase.

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