We Should Break Up: Banks Edition

What is Bernie Actually Talking About?

NorthWest Wing | Amir Dif | March 23, 2016

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In 2015, the largest bank in the United States, JP Morgan Chase, reported that it held $2.35 trillion in “assets under management” (which is just some fancy lingo used to measure the size of financial institutions). Yes, 2 trillion dollars. Bank of America, the second largest bank, holds $2.14 trillion. Wells Fargo gloomily lags behind in third place with $1.7 trillion under their belt. The largest 10 banks in the United States have over $11.2 trillion in assets foreign and domestic, but mostly domestic. These numbers are obviously incredibly large, and they’ve resulted in incredibly big bucks. In a single quarter of 2015, JP Morgan reported $24.5 billion in revenue.

There’s quite a good reason these banks are so large, and it stabilized the economy during the 2008 financial crisis. It’s crucial to keep in mind that for the most part, the largest banks did not cause the financial collapse. Smaller institutions did, and these are the institutions that went under. Many of them were crucially saved from collapse by the larger banks, saving tens of thousands of jobs.

“For better or for worse, banks aren’t going anywhere anytime soon.”

For example, Bank America had to buy the struggling firm Merrill Lynch, saving thousands of jobs in the process. The issue with the small banks was not size, but deregulation. Thanks to the large size and capital capabilities of the large banks, even further catastrophe was avoided.

The issue here isn’t the size of these institutions, or even with their insatiable desire for profit. It’s natural that in this day, almost everybody has money in a bank. And there’s more: banks fund new businesses, catalyzing innovation and growth in our economy, and the larger world economy. They’re crucial to our modern standard of living.

For better or for worse, banks aren’t going anywhere anytime soon.

Bernie Sanders | Source: Brookings Institution, flickr, cc
Bernie Sanders | Source: Brookings Institution, flickr, cc

My issue, specifically, is with the discourse surrounding banks. When presidential candidates like Bernie Sanders say that we “need to break up the banks”, what exactly do they mean, and what are the implications of their words? It’s become a sort of alarmist catch phrase that’s rarely thoroughly discussed or explained, so let’s do just that.

“Here, essentially, is where 2008 was caused.”

To understand this smashing of the banking monoliths, let’s firstly understand the anatomy of the modern bank. Most people are familiar with the retail portion of banks that handle people’s checking and savings accounts, as well as auto loans and mortgages. Simple stuff. However, there are then three other sections to the largest banks: the consumer business sector, the investment bank, and the asset management sector. This is where things get muddled in financial jargon and dizzying numbers.

Here, essentially, is where 2008 was caused.

Currently, our system works in such a way that these parts act under a conglomerate ownership. All of what JP Morgan Chase does is encapsulated under one stock (JPM). Under a different system where the banks were broken up, these four different sectors would become four different publicly traded companies.

This could be a very, very good thing for shareholders, all thanks to this little thing called a “conglomerate discount” which derives from a sum-of-parts valuation system.

Stock markets tend to undervalue large conglomerates. More often than not, large conglomerates tend to be privately held (think Koch Industries), because they won’t be undervalued if private, whereas more focused companies (Apple) are publicly traded. Essentially, each new publicly traded company would have huge potential upside for shareholders, making some people fabulously rich.

An analyst from Goldman Sachs, one of the largest investment banks in the world, released a letter recommending JP Morgan Chase do exactly what was mentioned earlier. That analyst, Richard Ramsden,wrote in January 2015 that he sees a potential 25% growth in each part of the bank, were it to split. Along with growth, markets and the economy will see brand new stability because trillions of dollars won’t be under one roof, but instead split under four different roofs, each with their own support systems.

Source: AP
Source: AP

It seems like a win for everybody, right? Eh, sort of. As per usual, there are a few people that lose. Namely, bank CEO’s. They currently all manage the largest banks in history, and under a new system, they’d be managing a quarter of that, and therefore making a quarter of their salary.

Overall? Taking a sledgehammer to the largest banks isn’t such a bad idea for the masses, if we focus on the long term game. But as always, resistance comes from those who benefit from the status quo. It looks like Bernie might be championing for the little guy after all.