What Would Actually Happen If We Broke Up the Banks?

Every year, the Financial Stability Board publishes a global list of "systemically important banks"; Bernie Sanders believes these banks should not exist. Were anything to go wrong at Goldman Sachs, Bank of America, Wells Fargo or the like, it would be 2008 all over again, complete with government bailouts, a Tea Party resurgence and Occupy Everywheres. Breaking up these banks seems prudent.

But there'd be a funny side effect to Sanders getting his way on this: bank shareholders and clever bank employees would probably make fortunes.

First, an irony: in January 2015, a Goldman Sachs stock analyst published a note suggesting that rival JPMorgan Chase should split itself into either two or four publicly traded companies creating as much as "25 percent potential upside." JPMorgan's consumer banking, business banking, investment banking and asset-management divisions would all be worth more on their own, the argument goes. Well, if it's true for JPMorgan, it's probably true for Goldman Sachs as well. Goldman has an investment banking business, an asset-management business, a merchant banking business and a real-estate business. As standalone businesses, they might well be worth more than Goldman is worth now, and any current shareholder of Goldman would make a quick profit.

Because of a fairly sticky conglomerate discount, the stocks of companies with diversified holdings are worth less than the sum of their parts. We have seen this before. In 1982, the government broke up AT&T into a series of regional phone companies that, over the following decades, expanded, contracted, competed, innovated and mutated into an industry full of (rather large) companies worth far more than what AT&T would be worth today had the breakup never happened. While not every corporate spin-off would be so successful, this has largely been a reliable way of unlocking value within public companies. In a pecuniary way, bank shareholders should welcome a successful Sanders presidency.

Sanders has the right idea about shrinking banks. But he'll probably make a lot of rich people richer in the process, and he'll definitely have to find a way to deal with the hedge funds next.

Read more: http://www.rollingstone.com/politics/news/what-would-actually-happen-if-we-broke-up-the-banks-20160209#ixzz3zkcbohQV