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Here’s Why Wall Street Analysts Don’t Think Wall Street Should Be Broken Up

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New York Stock ExchangeWalter Zerla—Getty Images

The cry to break up big banks in the hopes of preventing another financial crisis has been getting louder. The problem: Busting up say JPMorgan Chase (JPM), Bank of America Corp. (BAC), and rivals could hurt the economy and taxpayers, while benefiting the very bankers and their investors that many are trying to punish.

At least that is the analysis of Oppenheimer analysts Chris Kotowski, Allison Taylor Rudary, and Owen Lau in a client note Tuesday.

“In our view, the reason we have large national, universal banks is because the smaller geographically or product-focused ones kept on becoming unstable,” the analysts wrote in a note structured more like an op-ed than a typical research note. “We wanted to share our views as an industry observer with more than 30 years following bank stocks.”

Oppenheimer, a boutique investment firm, argued that mid-sized banking firms with a narrow focus, for example, Lehman Brothers and the securities business, are ultimately the most unstable. Since these firms tended to do all the same things collectively, at the same time, they also fall into crisis in sync—leading to systemwide problems like the 2008 financial crisis.

“The reason the stocks and funding for all the banks dried up in the summer of 2008 was that everybody knew that the system could not handle the simultaneous failure of Lehman, Merrill Lynch, Countrywide, Morgan Stanley, National City, Fannie Mae (FNMA) and Freddie Mac (FMCC),” Oppenheimer wrote, noting that these firms tend to be more volatile than their larger counterparts.

Of course, it’s not all that surprising that a bunch of Wall Street analysts would say that they think it is a bad idea to break up Wall Street. Although the analysts in question do work for one of Wall Street’s smaller firms, and would likely not be directly affected by talk of break-ups. Still, generally larger firms lead to richer salaries on Wall Street, driving up everyone’s compensation.

Still, the Oppenheimer analysts argue that if a big bank decided to break up, it would likely result in several of these narrowly-based firms. For example, if J.P. Morgan decided to split up, it would divide up its investment banking, card business, wholesale banking division and so on, rather than become little, diversified J.P. Morgans.

“It is reasonable to worry about the failure of a megabank, but what the 2007 to 2008 experience also shows us is that a whole bunch of smaller institutions replicating the same bad practices across dozens of different platforms is just as dangerous,” the analysts wrote. They also pointed to the Savings and Loan crisis as well as a number of other less well known ones that appeared be driven by problems at smaller banks and financial firms but nonetheless “all threatened to sink the Federal Deposit Insurance Corporation’s insurance fund.” Although it is hard to argue any of those were as bad as the recent financial crisis.

Breaking up the big banks has been one of the main slogans for Democratic presidential candidate Bernie Sanders during the 2016 election cycle. The Federal Reserve Bank of Minneapolis‘ president, Neel Kashkari, has called for banks to break up in a bid to protect taxpayers from another financial crisis. But investors are even clamoring for some big banks to split, saying it will unlock shareholder value.

That last assertion, Oppenheimer’s analysts can get behind.

“If the big three were broken up into say, three to four banks each (i.e., an investment bank, a card company, a branch bank and a wealth manager) we feel it would be a near-term benefit to investors as capital requirements would go down, and the conglomerate discount would be erased,” they wrote.