The government is forcing Wall Street banks to break apart - and these are the companies profiting
In the wake of the financial crisis, some of Wall Street's biggest banks were forced to start chopping off valuable assets to satisfy regulators intent on stamping out another "Too Big to Fail" crisis.
Now firms including Deutsche Bank and HSBC are facing calls to streamline their businesses. Even JP Morgan and Goldman Sachs have heard calls for breakups.
In some cases calls to reduce exposure to ancillary businesses stems from regulators' demands. But big banks also continue to face pressure from investors looking to get a better return on equity from the biggest banks in the country. In part due to the new regulations banks face, their return on equity is about one-third lower on average than it was in the years leading up to the financial crisis.
That has translated into an opportunity for less-regulated subprime lenders, private equity firms and other investors. Companies that are not regulated as the big banks are have enjoyed a disproportionate chance to build their businesses. Here are a few examples:
- General Electric is carefully dismantling its GE Capital business in accordance with its plans to satisfy regulators and remove itself from their list of "systemically important financial institutions," or SIFIs. That includes cleaving off more than $26 billion in real estate assets and also selling its private equity lending business. The Blackstone Group bought GE's real estate portfolio and the Canada Public Pension Investment Board bought the lending business. In the wake of the financial crisis, Blackstone's real estate portfolio has expanded significantly.
- Blackstone isn't the only US private equity firm to make big deals from unbundling banks. Apollo Global Management twice snapped up European assets from Bank of America. This includes a 2011 purchase of the bank's Spanish consumer credit card assets and Apollo's 2012 acquisition of BofA's Irish consumer credit card portfolio.
- When Springleaf Holdings bought OneMain Financial from Citigroup for more than $4 billion earlier this year, it created the largest subprime lender in the United States.
- JP Morgan last year sold off its large-market 401(k) recordkeeping business to Great-West Financial, part of Canadian financial services conglomerate Great-West Lifeco.
- JP Morgan also sold its physical commodities trading business to Mercuria, a Swiss energy investor formed by ex-Goldman traders. The transaction also represented a steep discount to JP's initial asking price.
- Also last year, JP Morgan dealt a stake in its One Equity in-house PE firm to Lexington Partners, a multi-billion dollar secondary market investor.
But there are plenty more spin-offs from banks - and likely, more to come. What remains to be seen is whether other bidders will play coy like Mercuria in order to squeeze sellers on price.