Oct. 19 (Bloomberg) -- Hedge-fund manager David Einhorn said JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. are among banks that the government should break up to ensure no company is “too big to fail.”

Einhorn said he’s buying gold to bet against the dollar because U.S. government and Federal Reserve policies may undermine the currency. Rather than buoying banks with bailouts, the U.S. should decide which lenders endanger the financial system and force them to shrink, he said.

“The lesson of Lehman should not be that the government should have prevented its failure,” Einhorn, who runs New York- based Greenlight Capital Inc., said in a presentation at the Value Investing Congress in New York. “The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system.”

Lehman Brothers Holdings Inc.’s bankruptcy in September 2008 caused credit markets to lock up and drove the Standard & Poor’s 500 Index to a 12-year low. The subprime-mortgage crisis also forced the U.S. government to take over American International Group Inc., Fannie Mae and Freddie Mac, prop up Citigroup and Bank of America and caused the Fed to facilitate the sale of Bear Stearns Cos. to JPMorgan.

In an interview following his presentation, Einhorn said that JPMorgan, Bank of America, Wells Fargo and Citigroup are among lenders that the U.S. would be forced to bail out if they were in danger of collapse. Their size would make their failure a threat to the financial system, Einhorn said.

‘Systemic Risk Regulator’

JPMorgan Chief Executive Officer Jamie Dimon said in March that the U.S. needs a “systemic risk regulator” and should set up procedures to deal with potential failures of large financial institutions. Joseph Evangelisti, a spokesman for the New York- based bank, declined to respond to Einhorn’s comment.

Scott Silvestri, a spokesman at Bank of America in Charlotte, North Carolina, Julia Tunis Bernard of San Francisco- based Wells Fargo, and Shannon Bell of New York-based Citigroup wouldn’t comment.

Einhorn, 40, whose hedge fund bet against Lehman four months before its collapse, recommended investing in gold because monetary policy in the U.S. and Japan will lead to inflation. Buying bullion is better than investing in the metal through exchange-traded funds, he said. Japan’s government is undermining the yen and that the nation may enter a “hyperinflationary currency death spiral.”

“Gold should do very well if there is a sovereign debt default or a currency crisis,” he said. “Picking currencies is like choosing my favorite dental procedure.”

Interest-Rate Wager

The investor said he purchased options to bet that interest rates will rise in Japan and the U.S.

“I prefer options to simply shorting government bonds because there remains a possibility of a further government bond rally in response to the economy rolling over again,” he said. “With options I can clearly limit how much I’m willing to lose while creating as much leverage as possible to a possible rate spiral.”

Greenlight, which Einhorn started in 1996, manages about $5 billion. The firm’s Greenlight Capital LP fund gained 16.3 percent in the second quarter, bringing its return this year to 21.5 percent. The fund lost 23 percent last year. Hedge funds returned an average 9.4 percent in 2009 through June after losing 19 percent in 2008, according to Hedge Fund Research Inc. in Chicago.

To contact the reporter on this story: Sapna Maheshwari in New York at smaheshwar11@bloomberg.net.

Last Updated: October 19, 2009 18:53 EDT