--Harrison: J.P.Morgan "the better model"
--Poor risk decisions, rather than size and diversity, cause problems
--Bank customers want lending and underwriting combined
(Adds comments from former FDIC chairman William Isaac, former Wells Fargo chairman and CEO Richard Kovacevich, and former Morgan Stanley chairman and CEO Phil Purcell.)
By Matthias Rieker
William Harrison Jr., the former chairman and chief executive of J.P. Morgan Chase & Co. (JPM), said breaking up big banks into separate commercial and investment banking companies would be "a huge mistake for the United States."
Mr. Harrison was responding to former Citigroup Inc. (C) Chairman and Chief Executive Sanford "Sandy" Weill, who said Wednesday morning on CNBC that big banks should be broken up.
Severing commercial and investment banking would improve the reputation of the banks, protect taxpayers, and reduce complexity, said Mr. Weill, who was instrumental in the repeal of the Glass-Steagall Act when his Travelers Group bought Citicorp in 1998 to create Citigroup.
While Mr. Weill built Travelers and later Citigroup, Mr. Harrison combined Chemical Bank, Manufacturers Hanover, Chase Manhattan Corp., J.P.Morgan & Co., and Bank One Corp., his last deal in 2004, to form today's J.P. Morgan Chase. He has no regrets in creating what bankers call a universal bank, he said in an interview Wednesday.
A universal bank is one that takes deposits and lends, does underwriting and trading of securities, and gives merger-and-acquisition advice.
"I was proud when I left J.P. Morgan" in October 2006, "and I became even more proud as the team led by Jamie Dimon led it to the next level, and I think it's the right model," he said.
The combination of commercial and investment banking is creating more stable banks, Mr. Harrison said.
"You couldn't be the size of J.P. Morgan if you weren't diverse in terms of having many different businesses. I think from a risk perspective, that should give one a lot of comfort," he said.
J.P. Morgan, after all, was dealing with credit derivatives long before Glass-Steagall was repealed. The savings and loan crisis, on the other hand, was caused by banks with no capital market exposure. And Bear Stearns Cos., an investment bank with no commercial banking business, required a rescue from J.P. Morgan Chase, which bought it in early 2008.
Poor risk decisions, rather than size and diversity, cause problems, Mr. Harrison said. "I am not sure by breaking all of us up you are going to change any of that."
"The better argument," he said, is diversification and size "properly managed, gives one a better risk profile." J.P. Morgan is "a good example of that." Even its recent trading loss from derivative hedges was "a manageable mistake" in terms of profitability and the bank's capital.
Losses from the credit derivative trades have cost J.P. Morgan $5.8 billion in losses so far this year, though two weeks ago it reported a $5 billion second-quarter profit, down 8.7% from a year earlier.
Mr. Harrison said in addition, bank customers demand the kind of combination of lending and underwriting that universal banks offer because such banks can help a particularly large corporation with complex capital issues.
Mr. Weill, however, said on CNBC, "I think the world changes, and the world we are living in now is different from the world we lived in 10 years ago."
He is not alone. Former Morgan Stanley chairman and CEO Phil Purcell said in an article in The Wall Street Journal last month that breaking up big banks, including Morgan Stanley, "would reduce their complexity, making it less likely they would fail." It would also improve shareholder returns, he said.
Morgan Stanley, founded in 1935, is itself a product of the Glass-Steagall Act of 1934; the firm was severed from J.P.Morgan.
Mr. Harrison disagrees. Returns at universal banks will be better than those at stand-alone investment banks and commercial banks, he predicted.
If banks were to be broken up, Mr. Harrison said, "I think you'd look back 10 years from now and say, 'Oh my god, what did we do?'"
Some bankers and former regulators remain skeptical that Glass-Steagall would have solved the industry's recent problems--or even had prevented them.
Richard Kovacevich, the former Chairman and CEO of Wells Fargo & Co. (WFC), told former Federal Deposit Insurance Corp. chairman William Isaac in an interview posted on Mr. Isaac's website last month, "If we had eliminated Glass-Steagall 40 years ago, instead of 15 years ago, this crisis is unlikely to have happened."
Wells Fargo had long been wary of investment banking, and its capital market operations remain small.
"The biggest problem of this crisis was the non-regulated investment banks that grew to an enormous size and with substantial and concentrated risks under the protection from competition by the Glass-Steagall Act," he told Mr. Isaac.
Mr. Isaac has argued that banks aren't too big--but too complex. In an interview Wednesday, he said, "Much of the complexity in our banking system today has nothing to do with separating underwriting of securities from deposit-taking."
"It seems likely that we will not be able to, and probably not even want to, turn the clock back to 1934," he said. "We are in a whole different era. It's a global banking system now, and we can't go back."
Mr. Isaac is now the global head for financial institutions at FTI Consulting Inc., and the chairman of Cincinnati regional lender Fifth Third Bancorp (FITB).
Write to Matthias Rieker at [email protected]
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