Obama shouldn’t break up the banks

BARACK Obama might be planning to limit the size of investment banks and the risks they can take on, but those who support a newer version of the legislation that emerged in the Great Depression – such as the now-defunct Glass Steagall Act – should take note: If the recent glut of US bank earnings tell us anything, it is that commercial loans are continuing to sour while investment banking saves the day.

Take Goldman, which of course makes the vast majority of profits from investment banking: it had a knock-out fourth quarter with earnings of $4.95bn (£3bn), after helping companies raise cash and manage risk. Tellingly, the only drag on earnings were commercial loans and securities and losses from trading credit products.

JP Morgan’s results earlier this week told a similar story. It posted a $399m loss at its retail arm in the fourth quarter of 2009, more than it did a year earlier when the credit crisis was at its most lethal. But it still managed to book higher earnings of $3.3bn compared to $702m in 2008, again thanks to investment banking. The same is true for Bank of America Merrill Lynch, and to a lesser extent Citigroup.

US banks are slowly on the mend, and will be buoyed by an increase in deal making, equity and debt underwriting, and restructuring work in 2010. They can help rebuild corporate America and use the proceeds to offset a far slower consumer rebound. Trying to stop them is madness.

Obama is trying to curry favour after the Democrats’ disastrous defeat in Massachusetts, but breaking up banks in any way will only destabilise a financial system that is approaching the final stages of recovery. That would end up costing him far more votes.