Breaking Up Big Banks Hard to Do as Market Forces Fail
Seventeen years ago fund manager Michael F. Price spurred the merger of Chase Manhattan Corp. and Chemical Banking Corp., creating what was then the biggest U.S. bank and laying the foundation for JPMorgan (JPM) Chase & Co.
Now he has a new message: It’s time to break up.
“Within the banks are wonderful assets,” said Price, who sold his fund-management company for $610 million in 1996 and now runs MFP Investors LLC in New York. “How long are the boards of directors going to stand by and take no action and let them be pounded? So far there’s no indication that any of these banks or boards of banks is willing to do anything about it.”
There’s little sign that market forces are changing the universal-banking strategy. Corporate raiders or potential takeovers don’t provide the same impetus for banks as they do in other industries. Laws prohibit non-financial firms from buying lenders, and banks can’t make purchases that give them more than 10 percent of U.S. deposits. JPMorgan, Bank of America and Wells Fargo were already at or above that level at the end of March, according to data from the Federal Reserve and the companies.
Managements and boards also are protected from market forces in ways they wouldn’t be at industrial conglomerates, said Amar Bhide, a professor at the Fletcher School of Law at Tufts University. Regulators won’t permit leveraged buyouts of banks, and the largest U.S. lenders are too large to be candidates for LBOs, he said.
“Unless somebody comes in and says, ‘Aha, this bank is trading so far below book value that I can come in and break it up and sell the pieces,’ what’s the incentive for the boards of directors?” Bhide said. “Banking is an industry where these things are simply not allowed.’”
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