Reverse banking consolidation?

Breaking up big banks questioned as losses mount

Excerpt:

Critics like Smith believe that Citigroup is worth more split up. Current CEO Vikram Pandit has rejected the idea, believing the company should come through the credit crisis in one piece.

But, John Reed, who as head of Citicorp forged the deal with Weill's Travelers Group, commented recently that the universal bank model didn't work. That's only been highlighted by Citigroup's stock price, down 71 percent from its 52-week high of $49.

Talk about how Citigroup and others should be structured will only intensify now that UBS appears to have turned its back on its "one bank" strategy. Switzerland's largest bank posted a hefty $5.1 billion write-down for the second quarter, and disclosed plans to separate its ailing investment bank from healthier businesses.

And, concerns about the execution of the business model are spreading, even among those who support the idea of financial conglomerates.

Ladenburg Thalmann's Richard X. Bove, one of the most outspoken banking analysts since the credit crisis began last year, wrote in a note that the "concept behind the creation of JPMorgan Chase has broken down."

Bove said JPMorgan's acquisition of Chicago's Bank One in 2004 was intended to beef up its consumer business, including banking and credit cards. That would help offset problems if the capital markets, like investment banking and related areas, were to falter. The problem is that both markets are currently weak.

He said JPMorgan's exposure was hurt further by the acquisition of crippled Bear Stearns in March. Still, despite all this, Bove feels the model is viable - and that JPMorgan can work through the troubles over a number of years by cutting costs and refining its businesses.

"No steel company can sell steel when auto manufacturers aren't selling cars, and no bank can make big profits when there's a weakness in the housing and credit markets," he said. "They have to ride out the cycle, minimize the losses, and maximize profits when the cycle returns. You can't restructure a company to avoid that cycle."

"In 1985, there were 14,500 banks in the U.S. - and now there's 7,200," he said. "For the past 23 years, six of them went away each week. The big universal banks might get hit, but they stay in business and come out with a bigger share of the market than they had before."

Comment: I do think Citibank is too big!