Notebook, 27 April 2013: TBTF – the Banks & Bill For Dummies

All of us are still living with Too-Big-To-Fail banks and the systemic Damocles-sword these banks hold over everyone’s head is still a major concern. In case you wonder, it’s even worse now than it was in the spring of 2008, when the first rumblings of dissatisfaction began making markets tremble. With only JPMorgan, Morgan Stanley and Goldman emerging from the collapse, and Lehman Brothers having been driven to outright failure, every other large investment banking house was swallowed up by retail banks – where you and I deposit our paychecks, hold checking accounts and go for loans. Home lender CountryWide was swallowed by Bank of America, as was Merrill Lynch. JPMorgan got Bear Stearns and Washington Mutual. Barclays managed to grab the pieces of Lehman Brothers it wanted for pennies on the dollar. Wells Fargo absorbed Wachovia. PNC ate up National City Corp and instantly became the fifth largest bank in the US. Washington didn’t stop the crash of Wall Street banks, the American depositor did, and therefore, through FDIC deposit insurance, these banks also put taxpayers on the hook in event of a failure – even if it’s a trading position gone sour, like JPMorgan’s London Whale trade or someone like Nick Leeson, who single-handedly sunk one of London’s oldest and most prestigious banks, Barings Brothers.

In other words, because Glass-Steagall was no longer there to prevent it, the danger to every individual and every business is now greater than it was before the financial crisis. The danger to the global economy is very close to absolute as well. Off hand, I cannot think of any country, even Venezuela who, under Hugo Chavez, paid off its debt to both the IMF and World Bank entirely, are insulated from even one, single mega-bank failure.

That’s the background.

So, what might seem like an unlikely move to many, Republican David Vitter from Louisiana and Ohio’s Sherrod Brown, about as progressive an elected official as we are likely to see in elected office have united the rural, American heartland suspicion of the Eastern Establishment and the political left’s disgust at unregulated capitalism to propose the Terminating Bailouts for Taxpayer Fairness Act of 2013:

Where other legislation and the market itself have failed, this one just might work, because the market is already there. If a company decided to liquidate, the theoretical price it could command for its assets is known as it’s book value. Therefore, the book value should set a floor on share prices. Buyers also pay a premium for market share, goodwill, etc. and bidders at auction tend to get away with fire sale prices. Like I say, it’s theoretical, but book value does try to represent (mostly) tangible worth. As has often been noted out there already, shares of TBTF banks are generally running at or even below book value:

Bank Book Value per Share Quote Price to Book
Wells Fargo 28.30 37.88 1.34
Bank of America 20.30 12.42 0.61
CitiGroup 61.57 46.92 0.76
Goldman Sachs 144.66 144.11 0.996
JP Morgan Chase 52.01 48.88 0.94
State Street Bank 44.73 57.86 1.29
Bank of New York Mellon 29.83 27.89 0.93
PNC Financial 67.07 68.10 1.02
Morgan Stanley 30.70 21.40 0.70

A quick look will suffice to see how this has changed over the last decade or so:

Basically, what the market says here is that there’s no upside going forward. Whatever earnings growth will surely take place, there isn’t enough market confidence to price that into shares. Some might cite regulatory uncertainty, others take note that given the legal risk weighing over them, the overhang from years of underhanded business practices and other forms of headline risk, the fact remains that almost certain earnings growth is not being priced into these shares as it is for almost every other publicly traded company.

Which brings up why Brown-Vitter might work. Stronger equity capital requirements both targets and takes advantage of shareholder skepticism of these banks, and who then might actually be incentivized enough to agitate for the potential profits lying between the liquidation prices these complex institutions are trading at and the potential gains many think await their break up.

UPDATE: Seems I’m not the only one making the connection between Brown-Vitter and TBTF banks trading at book.

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2 thoughts on “Notebook, 27 April 2013: TBTF – the Banks & Bill For Dummies

  1. To my way of thinking, the big banks share a common problem with their old-line counterparts in the airline industry. Like the legacy air carriers, the top banks in this country have yet to find a sustainable profit-making model in a changed world.

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