For JPMorgan, breaking up could be hard to do

Pedestrians pass in front of the JPMorgan Chase headquarters building in New York.
Ron Antonelli | Bloomberg | Getty Images
Pedestrians pass in front of the JPMorgan Chase headquarters building in New York.

The JPMorgan Chase breakup drumbeat is starting up again on Wall Street.

With the largest holding company in the U.S. by assets ($2.53 trillion) in regulator crosshairs, industry analysts are wondering how long it will be before the company splits up and how a breakup would occur.

The bank itself has been mum about its future in that regard, but that hasn't stopped a growing swell of speculation about what will happen.

Sparking the latest round was the Federal Reserve's move to make JPM effectively hold 12 percent of capital as a required buffer against the type of systemic breakdown that precipitated the financial crisis in 2008 and 2009. Through stress tests and additional measures, the Fed and other regulators are looking to prevent another "too big to fail" event.

But the capital requirement at least on its face is greater than its peers, increasing anticipation that the anti-JPMorgan crowd may finally get its wish and see the firm split into as few as two or as many as four pieces.

The Fed's capital proposal had the effect of "reigniting the debate about whether a breakup could unlock shareholder value given that size is now a regulatory negative," Goldman Sachs analyst Richard Ramsden and others said in a note to clients. The analysis noted that JPM could be "a victim of its own success," targeted in part because its ability grow in the face of a challenging environment has made it a regulator target.

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Indeed, there is strong irony about the company's disfavor: It is as large as it is also in big part because it not only absorbed Chase when it was reeling but also took on other flagging banks—Bear Stearns and Washington Mutual—during the financial crisis, largely at the Fed's behest. While the deals were done at terms that favored JPMorgan, the moves arguably helped stem damage from the crisis.

The company is coming off a strong year at least in terms of revenues. The firm ranked at the top for investment banking fees, raking in $6.3 billion or 7 percent of market share, according to Thomson Reuters data. JPM was the top bank in six different sectors.

However, investors have been wary. Shares gained just 7 percent for 2014, trailing the S&P 500's return of 11.4 percent and badly behind money-center peers such as Morgan Stanley (23.7 percent), Wells Fargo (20.7 percent) and Bank of America(14.9 percent).

JPMorgan officials did immediately comment for this report.

Goldman believes a breakup into two or four parts, depending on your choice of scenario, "could unlock (shareholder) value in most scenarios although the range of outcomes we assessed is wide, at (5 percent to 25 percent) potential upside.

"Upside is sensitive to the magnitude of the multiple rerating, the speed and size of potential capital returns from each stand-alone business, and reductions in estimated synergies," the report said.

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However, Ramsden's report cautions of the "execution risk" involved—essentially, that JPMorgan is so big that breaking it into smaller parts would be labor-intensive with many moving parts. Besides, the surviving entities would be so big themselves that they may not get much of a break themselves in terms of capital requirements.

Banking analyst Christopher Whalen handicaps a 1 in 3 chance that JPM executes a big breakup, and probably a better chance that it begins to sell off assets in a more gradual manner. The latter scenario, he said, is likely with many big institutions, with a move like a breakup of the Bank of America-Merrill Lynch marriage put together during the crisis a decent probability.

In JPM's case, the result, then, could be a simple separation of JPMorgan and Chase, ending the merger put together in 2000 and separating institutional and consumer operations.

"If you really start breaking these things up, you call into question why the Fed put them together in the first place" said Whalen, senior managing director at Kroll Bond Rating Agency. "They kept slamming dead banks together because they didn't know what else to do."

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He expects some form of "voluntary breakup" to occur for both a company and an industry that regulators are having a difficult time trying to control in a post-crisis environment. The effort comes after a period in which banks began absorbing not only other institutions but also sectors, such as auto loans and credit cards, that traditionally had been considered "nonbank" businesses.

"Now you have a huge concentration in asset classes, and these things are too big—they're really too big to manage," Whalen said.

"The Fed is struggling for a way to approach these issues," he added. "They never should have put these guys together in the first place."