'Too big to fail' banks may try to get smaller

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- Wall Street appears to have beaten Washington to the punch.

While lawmakers enter the home stretch on regulatory reform with Thursday's Senate vote, the financial industry has already started to shake up how it does business ahead of the proposed new rules.

Just last week, Wells Fargo (WFC, Fortune 500) said it planned to shutter its more than 600 Wells Fargo Financial stores across the country and announced it was no longer going to make mortgage loans to people without stellar credit.

And on Tuesday, Citigroup (C, Fortune 500) said it had struck an agreement to transfer the management of part of its private equity business to outside parties StepStone Group and Lexington Partners.

Neither Wells nor Citigroup acknowledged that the moves were prompted by the proposed legislation which is expected to be signed into law by President Obama as early as next week.

But analysts suggest they could mark the first wave in a series of divestitures and business closings as new rules for the banking industry take effect.

"I wouldn't be surprised if we saw more of that," said Whitney Young, bank analyst for Raymond James.

Of course, regulatory reform isn't entirely to blame. Wells Fargo's consumer finance division has been struggling for some time. Citigroup, on the other hand, has been shedding assets and exiting various businesses over the past year.

Nevertheless, many firms are expected to soon face similarly tough choices about what they hold onto and what they let go as a result of the new laws. It's somewhat ironic that banks may look to downsize as a result of reform, considering that the bill has been criticized by some for not doing enough to tackle the issue of banks being "too big to fail."

Most discussions will center around consumer-oriented businesses or divisions that are linked to financial markets, said Roger Lister, chief credit officer for U.S. and European financial institutions at the ratings agency DBRS.

One key provision of the proposed legislation would require the creation of an independent Consumer Financial Protection Bureau, an agency that would be empowered to curb unfair practices in consumer loans and credit cards.

Many analysts viewed Wells Fargo's decision to close down its consumer finance unit, a business that has been around for more than 100 years, as a response to the proposed federal agency.

The reform bill would also limit just how much banks can invest in private equity and hedge funds. Otherwise known as the "Volcker rule", it has already prompted serious questions about the fate of some of these businesses.

For example, many have wondered what JPMorgan Chase (JPM, Fortune 500) plans to do with its internal hedge fund Highbridge Capital. Morgan Stanley (MS, Fortune 500) has also reportedly been weighing its options for its ownership stake in the hedge fund FrontPoint.

Spinning off these divisions or selling them outright might be viable options. Although with so many similar businesses entering into the market, it begs of the question of who exactly would buy them now that they are in regulators' crosshairs.

"That's more complicated since another person has to say 'I like that business,'" said Lister.

While Citi and Wells are taking action now, the industry is certainly under no significant pressure to act. Firms affected by the Volcker rule will have until 2017 to make sure they are in compliance with the new law. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,973.12 -9.47 -0.06%
Nasdaq 4,445.55 0.64 0.01%
S&P 500 1,974.78 -4.13 -0.21%
Treasuries 2.47 -0.02 -0.72%
Data as of 11:44am ET
Company Price Change % Change
Frontier Communicati... 6.90 0.95 16.08%
Windstream Holdings ... 12.33 1.80 17.09%
AT&T Inc 36.82 1.17 3.28%
CenturyLink Inc 39.86 2.15 5.70%
Apple Inc 98.43 -0.59 -0.60%
Data as of 11:29am ET

Sections

UBS is the latest major bank to get sucked into a U.S. probe over 'dark pool' trading venues. More

New annual report from U.S. government shows the long-term prognosis for Medicare has improved thanks to slower health spending, while the outlook for Social Security remains unchanged. More

Amazon's new 3-D Printed Products store offers shoppers over 200 customizable items like toys, jewelry and home decorations. More

These niche sectors are attracting attention -- and, more importantly, money -- from small business lenders. More

Steve Mason, a pastor from California, inherited more than $100,000 in student loan debt when his 27-year-old daughter died suddenly in 2009. With interest and late penalties, the debt has since ballooned to $200,000. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.