Now that JPMorgan Chase has become the poster child for more stringent financial reform, the banking giant should also serve as the model for preemptively breaking up an institution too big too fail.

Ex-FDIC Chief: Shrink JPMorgan Chase to ‘Manageable Size’

Ex-FDIC Chief: Shrink JPMorgan Chase to ‘Manageable Size’

Now that JPMorgan Chase has become the poster child for more stringent financial reform, the banking giant should also serve as the model for preemptively breaking up an institution too big too fail.

Sheila Bair, the former chairman of the Federal Insurance Deposit Corp. said as much in an article published by Fortune.

With hedge trading losses likely surpassing $3 billion – and counting, JPMorgan Chief Jamie Dimon should take the lead ahead of Washington, D.C. reformers and break up the megabank, which has also sustained a 20 percent loss in stock value since the stunning announcement of the trade losses two weeks ago.

“The best way for Dimon to provide a better return to his investors is to recognize that his bank is worth more in smaller, easier-to-manage pieces,” wrote Bair. “Let’s face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over.”

Nonetheless, Bair said, the FDIC and the Federal Reserve will take on the role of down-sizer when deemed necessary.

Regulatory reform now being implemented by the regulators will force megabanks to produce “living wills.” Regulators want a credible breakup plan in place if these institutions get into trouble and threaten the U.S. financial system.

For example, JPMorgan Chase, Bank of America and others would have to identify the legal entities that support their investment-banking operations, trading and brokerage activities, and commercial and retail lending.

“If, by downsizing, Dimon can achieve valuations comparable to the regional banks, he will potentially release tens of billions of value to his shareholders. And rule the roost once again,” Bair wrote.

 

 

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