We’ve been hearing for quite a while about the banks that are “too big too fail”, though the claim is always a bit vague. In the February 6 issue of Fortune, Sheila Bair makes an argument that big isn’t better. In fact, she argues, it would be in the best interests of the stockholders of those large institutions to encourage them to follow the lead of Kraft and McGraw-Hill and break down the giant institutions.
So what about banks? It would surely be in the government’s interest to downsize megabanks. Sen. Sherrod Brown (D-Ohio) continues to push his bill to split apart the largest institutions. Regulators have new authority to order divestitures under the Dodd-Frank financial reform law. From a shareholder standpoint, government breakups have a pretty good outcome. It worked out well for John D. Rockefeller, whose shares in Standard Oil doubled after it was ordered to break up. Ditto for those who owned stock in AT&T (T).
Though the banks–like many other businesses in America–have been working hard at growing ever-larger, Bair’s numbers indicate that size actually hurts profitability. And, of course, we know how well those those mega-banks are working out for the rest of us and for the economy as a whole.