With people from former Federal Reserve Chairmen Paul Volcker and Alan Greenspan to former Citigroup (NYSE: C) Chairman and CEO John Reed suggesting that banks viewed as "too big to fail" should be broken up, it is worth looking at the history of government-mandated corporate breakups and the results.
In doing so, two common themes emerge. First, break-ups of corporate monoliths seem to be a boon to shareholders; the sum of the parts tends to be greater than the whole. Second, break-ups tend to be undone over time, as constituent parts reunite.
John D. Rockefeller's Standard Oil (1911)
Probably the most well-known such break-up was that of the Standard Oil Company, which in 1900 controlled 90% of the refined oil in the U.S. On May 15, 1911, a unanimous Supreme Court decision mandated the breakup of John D. Rockefeller's company within six months. It was duly divided into 34 separate companies, including what would ultimately become ExxonMobil (NYSE: XOM) and Chevron.
In a recent speech to the Council on Foreign Relations, former Fed Chairman Alan Greenspan said, "In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole."
Evidently, that came as no surprise to Rockefeller. According to biographer Ron Chernow, upon being informed of the Supreme Court decision, Rockefeller "turned to his golfing partner and said, 'Father Lennon, have you some money?' And the priest was very startled by the question and said, 'No.' And then he said, 'Why?' And Rockefeller replied, 'Buy Standard Oil.'"
While pre-World War I stock data isn't easy to come by, some have asserted that the break-up doubled the value of Standard Oil stock.
The "Baby Standards" remained separate for the next 20 years, but by the 1930s began recombining. There were four mergers of Baby Standards during the 1930s, and many more followed until, by 1980, the 34 companies had combined into just 14.
Ma Bell: AT&T (1984)
In the modern era, the most well-known government break-up is the 1984 split of AT&T (NYSE: T) into seven "Baby Bells."
On August 5, 1983, Judge Harold Greene gave final approval to a consent decree that resulted in AT&T divesting its local operations but allowed AT&T to enter the computer business (while retaining the long distance telephony business).
As with Standard Oil, shareholders were big winners when the sum of the parts proved greater than the value of the whole. AT&T stock ended 1983 at $61.50; by the end of 1984, a new AT&T share, along with proportional shares in each of the Baby Bells, was worth $74.06. That equated to a 20% gain during a year in which the Dow declined by 3.7%.
By the 1990s, the Baby Bells began merging. Today, the eight original companies -- AT&T plus seven baby Bells -- have combined into AT&T, Verizon (NYSE: VZ), and Qwest (NYSE: Q), plus a few spare parts.
Glass-Steagall 1.0 and the House of Morgan
The closest parallel with the current banking debate, however, is the Glass-Steagall Act, which created a separation between commercial and investment banking from its passage in 1933 to its effective repeal with the Gramm-Leach-Bliley Act of 1999. Glass Steagall forced the break-up of "universal" banks such as J.P. Morgan & Company.
J.P. Morgan divested its U.S. investment banking operation into Morgan Stanley (NYSE: MS), founded on September 16, 1935, while retaining the commercial banking business. In its first year as an independent firm, Morgan Stanley claimed a market share of 24% of public offerings and private placements.
While J.P. Morgan never reunited with Morgan Stanley, it ultimately reentered the investment banking business on its own. In 1989, J.P. Morgan became the first commercial bank to underwrite corporate debt securities since 1933 by underwriting an offering of 9.2% notes for Xerox, and the following year it gained Fed approval to underwrite stocks.
Glass Steagall 2.0
So what does all this imply for a potential Glass-Steagall 2.0?
If history is any guide, a new regulation will be beneficial for shareholders. Were Citigroup broken up into an investment bank, and one or more commercial banks (or even Wells Fargo (NYSE: WFC) into several "Baby Wells") the individual parts may once again prove to be worth more than the whole.
Such break-ups may prove similarly temporary. The lines between commercial and investment banking are no longer so clear, as the distinction between making loans and underwriting stocks and bonds has been blurred by the advent of securitization, derivatives, and other financial innovations. As a result, it may take far less than a half-century for new products and markets to encroach upon the limits of a Glass-Steagall 2.0.
Still, the history of government-mandated corporate breakups should have investors licking their chops.
Editor's note: An earlier version of this story misrepresented the remaining parts of the original AT&T. The Fool regrets the error.
Fellow Fools Ilan Moscovitz and Morgan Housel agree with Volcker, Greenspan, and Reed that it's time to end "too big to fail." Do you agree? If so, do you see opportunity as an investor? Let me know in the comments section below.
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