Merrill Lynch is already a breakup target, and those who haven't thought about it surely will after this week's first-quarter loss of nearly $2-billio

UBS's former chief, Luqman Arnold, thinks it's time to hack away at the massive Swiss bank. The old marriage of smooth, German-speaking private bankers in suspenders with Harvard MBAs might never have really worked. But after $37-billion (U.S.) in writeoffs, the relationship may finally rupture and Mr. Arnold believes that may be a good thing.John Reed, the banker who helped pull off the $80-billion deal that created Citigroup in 1998, admitted last week that he has regrets. Give him points for honesty but not for originality: In 2006, a year before the Epidemic of Mortgage Despair, it wasn't hard to find investors who believed the bank would be worth a lot more carved in pieces than the $50 stock price (since cut in half) would indicate.Is this the end of the so-called financial supermarket, one of the biggest business concepts to come out of the 1990s? It seemed like a good idea at the time. If you can sell mortgages, business loans and financial advice, why not home insurance and mutual funds, too? Why not online trading, loans for hedge funds, private investments in Asia? Health coverage for the family cat?That was then. Now, more equals morass. Any big bank that runs into losses immediately finds itself in a debate about whether complexity is to blame. CIBC dropped $3-billion on U.S. mortgage securities and before you knew it, Bay Street was chattering (albeit not that seriously) about whether CIBC World Markets could be divested. This is one of the two or three best investment-banking franchises in Canada. In the blogosphere, Merrill Lynch is already a breakup target, and those who haven't thought about it surely will after this week's first-quarter loss of nearly $2-billion, its third successive quarter in the red.Merrill seems the epitome of the problems with growth gone wild. The firm is in Uruguay. It's in Indonesia. It's in Lebanon. The sun never sets on Mother Merrill's empire, and the building of it is one reason the market capitalization has risen from $32-billion to $45-billion in 10 years. But look closer: The share price is still where it was a decade ago. All of the "growth" has come from a rising share count.But is it really time to bust apart the world's great financial conglomerates? Don't count on it. If anything, the supermarket idea may emerge from the current mess looking better than before. That's not to say that Citi or UBS or Merrill or Morgan Stanley will carry on as they are. But they didn't falter because they're too big. That's just an excuse for inept management.The breakup crowd has scored some points lately. Diversified banks, like all conglomerates, often trade for less than the sum of their parts. But the bigger problem, and one that is apparent only in rough times, is the risk that rot in one part of the business harms another. Mr. Arnold calls UBS's reputation "comprehensively destroyed" by its trading blunders in mortgage securities that had nothing to do with customers. If you were, say, a Belgian multimillionaire, would you hesitate now before handing your money over to UBS? Mr. Reed wonders whether Citi, in trying to straddle the globe, became unmanageable.
But - for all their problems - UBS and Citi are still here. The biggest failures of this crisis are not the conglomerates but the specialists: Countrywide Financial, mortgage "originators," monoline bond insurers. Bear Stearns had a few different lines of business, but for its size, it was overly reliant on prime brokerage customers - hedge funds - which is one reason its liquidity dried up so suddenly in mid-March. But when they needed billions in fresh capital, Citigroup, UBS, CIBC and other diversified banks were all able to get it. Why? Because the supermarket model has its benefits, too. Each of those banks has something on which to rebuild. Few noticed, but the truly Swiss part of UBS, business banking and wealth management, had a crackerjack year in 2007, posting a 16-per-cent rise in pretax profit. CIBC has one damaged franchise but several very good ones, including its credit card unit.There is another reason, too, why the conglomerates will survive. For every Citigroup or CIBC, there's a JPMorgan Chase or a Royal Bank of Canada - just as large and complicated - that appears to be making it work. And guess what: The balance of power has now shifted in their direction.When the credit markets are fine, and XYZ Corp. needs money, it doesn't need RBC; it can just tap the bond market. But when it requires a cattle prod to get anyone to buy high-yield debt, suddenly a bank's balance sheet comes in handy. The banks that will be able to make the loan - on their own terms - are large and diversified. Big banks helped get the U.S. economy into the soup. But the healthy ones will also help get it out. Long live the mega-bank, an imperfect idea whose time has come