Jeremy Warner: Bank break-ups may be good for shareholder value
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Andrew Feinberg
White House Correspondent
Outlook: If an incoming Conservative government does decide to push the button and break up the banks, as suggested by the shadow Chancellor, George Osborne, in a speech this week, Royal Bank of Scotland has just the man to perform the necessary surgery. Sir Philip Hampton, parachuted in by the Government as chairman when the taxpayer was forced to take control, earned his reputation as a star finance director, first by breaking up British Gas and then later British Telecom.
In fact, he did two break-ups while at British Gas. The first under regulatory pressure was to separate the retail gas business Centrica from the wholesale pipelines interests, Transco. Then later, the residual oil and gas exploration interests were also hived off from Transco to become BG Group. Hugely value-creative for shareholders these demergers have proved too.
The demerger of BT's mobile-phones arm into O2 proved equally successful from a shareholder-value perspective, though arguably it wasn't ultimately very good news for the remaining BT rump, which has struggled strategically without the mobile-phone interests enjoyed by other nation incumbents. Still, at the time, it was part of the price that shareholders demanded for backing a rescue rights issue.
In any case, Sir Philip is plainly very good at breaking up companies. When that's what he's asked to do, he just gets on with it. His execution is said to be exemplary. In point of fact, the break up of RBS has already begun. The bank is selling off assets as fast as it decently can, but this is more in the cause of repairing capital and reversing the idiocy of the past than value-creative structural change.
Yet there is no reason he shouldn't eventually go further by separating the investment banking type operations from the retail bank, and then perhaps later breaking up the retail/commercial bank into smaller parts too. On writing about this issue yesterday, I said the application of such a policy would be potentially catastrophic for Lloyds Banking Group.
In fact, it would only be catastrophic for the architects of the merger with Halifax Bank of Scotland – Sir Victor Blank, the chairman, and Eric Daniels, the chief executive. HBOS's worse-than-expected bad-debt position has already made the acquisition a disaster for them, but at least they have succeeded in creating a new banking goliath with market dominant positions across a wide range of financial services.
That strategy too would lie in tatters if Lloyds Banking Group were forced to break itself up. As I say, this would be a catastrophe for Sir Victor and Mr Daniels, but it wouldn't necessarily be bad for shareholders. To the contrary, for most big corporations, the sum of the parts is nearly always worth more than the whole. There's no reason to believe it would be different for banking.
In response to the banking crisis of the 1930s, the US introduced the Glass-Steagall Act, which enforced a rigid separation of ordinary retail and commercial banking from investment banking. By so doing, US lawmakers hoped to prevent the fee-driven money men of Wall Street from ever again squandering the savings of ordinary Americans. It seemed to work. There have been banking crises since then, but none of them nearly so serious or systemically devastating. Until now, that is.
It is hard to avoid the conclusion that this might have had something to do with the repeal of Glass-Steagall in the late 1990s, when deregulation was the prevailing political and economic orthodoxy. Within years, the investment bankers were up to their old tricks, using the balance-sheet strength of big commercial banks to engage in all kinds of weird and wonderful fee-earning innovations and deals.
Banks don't need to be big to be successful. They just need to be well run. Once they become big, they become systemically important and thereby potentially dangerous. As Mr Osborne put it, banks that are too big to fail may also be too big to bail.
The current rush to rescue insolvent banks from the consequences of their own folly may have been entirely necessary to save the economy from a second Great Depression, but it has also succeeded in creating unprecedented levels of moral hazard, and has thereby undermined the natural tendency of markets to self-correct and regulate.
If depositors and investors know there is no safety net, they tend to be a bit more careful about who they entrust their money to. This crisis has only confirmed the comfortable assumption that when things go wrong there's always nanny state to look after you and bail you out.
By all means allow the investment bankers to innovate, trade and do their deals, but not with my money, thank you very much. I'd much rather have it looked after by an old-fashioned banker like Captain Mainwaring.
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