Breaking up big banks questioned as losses mount

NEW YORK — America's biggest banks have suffered unprecedented losses from the ongoing credit crisis, and that's made some investors question whether the big financial conglomerates should be broken up in order to survive.

Break-up advocates, who for months have been clamoring for Citigroup Inc. to be dismantled, got some validation of their viewpoint this past week. Europe's UBS AG — created through the combination of Swiss Bank Corp. and Union Bank of Switzerland in 1997 — on Wednesday laid the groundwork to tear up its business model after another quarter of steep losses.

Though the UBS announcement was expected, it was nonetheless a departure from what executives promised during a wave of big bank deals that began in the late 1990s. The creators of global banks like Citigroup, JPMorgan Chase & Co., and HSBC Holdings PLC had promised customers and shareholders that a diverse set of businesses would shield them from economic volatility.

But those models haven't sheltered the banks from the subprime mortgage crisis that turned into a dislocation of the credit markets. Major global banks have taken more than $300 billion in asset write-downs, and organizations like the International Monetary Fund believe that amount could reach $1 trillion.

"The whole idea was, 'let's be so unbelievably diversified that we won't be affected,' but when the credit markets seize up, no matter what kind of financial company you are, everything seizes up," said William Smith, president of New York-based Smith Asset Management. "The UBS statement basically shows the model is a failure."

That's not what former Citigroup chief executive Sanford Weill envisioned when the company was created in 1998 by the combination of Citicorp and Travelers Group. He maintained that offering a mix of financial products — such as investment banking at Salomon Brothers, brokerage services through Smith Barney, and Citibank's retail and consumer banking — would protect the company.

Critics like Smith believe that Citigroup is worth more split up. Current chief executive officer 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.