6 Big U.S. Banks Targeted for Breakup


Second time's the charm, or so hopes the Democratic senator from Ohio, Sherrod Brown, who is again trying to enact legislation that would forcibly break up America's six biggest banks. If he's successful, it would change the face of U.S. banking. But despite the country's disgust with Wall Street, it's a change that wouldn't necessarily be for the better.

It's not me, it's you. How to break up a bank.
Brown's reasoning is familiar: The 2008 crash demonstrated that America's major banks were too big to fail then and remain so today. And the only way to avoid another taxpayer-funded bailout is to break them up now. If enacted, the law would affect the following banks, the six largest by total assets in the U.S.:

  1. JPMorgan Chase (NYS: JPM)

  2. Goldman Sachs (NYS: GS)

  3. Bank of America (NYS: BAC)

  4. Citigroup (NYS: C)

  5. Wells Fargo (NYS: WFC)

  6. Morgan Stanley

Brown's legislation would mandate that these banks shed assets and/or exit lines of business as required to meet certain size and leverage limitations as defined in the senator's bill, to wit:

  • No bank could hold more than 10% of the total amount of money deposited in FDIC-insured banks.

  • No bank could possess non-deposit liabilities exceeding 2% of the country's annual GDP.

  • Banks with assets equal to or greater than $50 billion would have to maintain equity of at least 10% of total assets.

In 2010, the first time Brown tried to pass breakup legislation, the vote was 61-33 against when the Senate and the House of Representatives were both in Democratic hands. So why try again now, when the House is firmly in Republican hands and memories of the bank bailout have naturally faded from the minds of the American people?

Three lonely senators walk into a bar
Brown recently told the Financial Times he believes there's more sympathy for the idea now. The new bill has two co-sponsors: Tom Harkin, Democrat from Iowa, and Bernie Sanders, independent and self-described "Democratic Socialist" from Vermont.

With two Democrats, one semi-Socialist, and not a single Republican on what is a very short list of co-sponsors, it's not clear there's much left-leaning sympathy in the Senate for the new legislation, let alone the bipartisan sympathy that would be needed for this bill to get to the president's desk. But Brown does have the support of some prominent figures in the financial world:

  • Richard Fisher, president of the Dallas Fed, has been quoted as saying: "My personal preference is for an international accord to break up these institutions into ones of more manageable size."

  • James Bullard, president of the St. Louis Fed, concurs: "I do kind of agree that 'too big to fail' is 'too big to exist.' "

Brown has also found sympathy in Brad Miller, a House Democrat who has introduced a bill similar to Brown's in that chamber.

The advantage of small group dynamics
There's certainly merit to the idea that limiting the size of banks will limit their potentially destructive, cascading effect on the economy if one does blow up. It's simple common sense that the smaller the institution, the smaller the effect it can have on other banks. On the other hand, big institutions might be easier to bail out when things do go wrong.

As Lehman Brothers was evaporating before everyone's eyes in September 2008, and it seemed like nothing could be done to stop the contagion from spreading, then-Treasury Secretary Henry Paulson was able to get on the phone with the CEOs of nine of the country's biggest financial institutions, corral them into a single room, and, in the course of a night, personally plead, cajole, and threaten them into accepting the bailout deal that would ultimately stabilize the U.S. banking system, and with it the American economy.

If there had been dozens of bank chiefs Paulson had to try and gather to talk into a deal, the deal might not have been done at all, or not done quickly enough to stop all the dominoes from falling.

Evolution, not revolution
Banks have always gone bust, and will continue to do so, no matter their size. There's nothing that says you can't have a banking crisis if all of your banks are small.

And there's a lot of financial regulation still falling into place, including the Dodd-Frank financial reform act (which includes the Volcker Rule, stress testing, and living wills) and the Basel III global regulatory framework. For the moment, maybe it's best to give these reforms the chance to shake out before taking any further measures.

There's something to be said for evolution, rather than revolution. But if the big banks aren't you're cup of tea when it comes to investing, you can find out about some delightfully straightforward bank stocks, including one Warren Buffett could have loved in his earlier years, in our special free report "The Stocks Only the Smartest Investors Are Buying." Take a minute and download your copy while it's still available.

At the time thisarticle was published Fool contributor John Grgurich thinks an all-expenses-paid junket to New York City to straighten all this out is justifiably in order, but he owns no shares of any of the companies mentioned in this column. Follow John's dispatches from the bloody front lines of capitalism on Twitter, @TMFGrgurich. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo and The Goldman Sachs Group. The Motley Fool has a positively gripping disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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