--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before Glass-Steagall was repealed.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 matthias.rieker@dowjones.com
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