The former chairman of Citigroup (
) - who was the architect of the 1998 mega-merger between Citicorp
and Travelers Group and its subsidiary, Salomon Smith Barney -
called this week for the equivalent of readoption of the
The provisions of Glass-Steagall, which stem from the Banking
Act enacted in 1933 at the end of the Great Depression, imposed
banking reforms intended to control speculation. The Act limited
commercial banks' securities activities and affiliations between
commercial banks and securities firms. Weills' alliances caused
President Bill Clinton to declare, "The Glass-Steagall Act is no
In March of 2009, Citigroup Inc qualified as a financial holding
company, among the first to take advantage of the new
, the Financial Services Modernization Act signed by President
Clinton in November 1999.
Undoubtedly, many wish Mr. Weill had reached the conclusion that
giant diversified banks are too big, sooner, as the lack of bank
regulation and creation of "too-big-to-fail" institutions were the
proximate causes of the 2008 financial crisis.
Weill now suggests that the best way to make money as a bank is
as a "pure-play company" that can operate consumer and proprietary
units without fear of running afoul of new regulations. Certainly,
that might improve bank valuations. The three largest U.S.
diversified banks with both commercial and investment banking
operations trade well below their peers that lack these
Without consideration to the macroeconomic impacts of breaking
up the big banks, investors in these companies surely would benefit
from splitting their operations. Citi, BofA (
) and JPMorgan (
) trade either at or well below tangible book value. Relative to
the SPX, this group of three, combined with Morgan Stanley (
) and Goldman Sachs (
), have underperformed so far this year by 2%. From their October
2011 lows, their price performance has been positive by 14% but has
underperformed the SPX by 7%. Meanwhile, the Large Cap Regionals
and Mid-Caps are significantly off their lows and outperforming the
index for the year.
These combined commercial banks/investment companies need to
listen actively to their investors and take action to avoid being
targeted by activist investors who will force the changes necessary
to build shareholder value.
The deck is stacked against the big banks right now because
growth is slowing, Europe's financial health remains a giant
question mark, and investors are nervous. The issue of regulatory
reform - in an election year when nothing is likely to be resolved
- continues to loom over the group. That, too, translates to
uncertainty for investors, who therefore loathe committing.
, an analyst at CLSA LTd., recently wrote that Morgan Stanley is
trading at less than half of its liquidation value and could double
if broken up. While Morgan Stanley is relying on a strategy of
shrinking some of its operations and reducing riskier assets, Mayo
calls for stronger action. The firm's second quarter results bear
him out, as results significantly lagged consensus due to a reduced
top line. The 5-year historical growth rate for Morgan Stanley is a
negative 16.5% according to
, and the firm's risk level is rated above average. The shares are
trading on a price-to-book ratio of 0.4 x - about 70% below the
industry average of 1.3 x.
Investors already have perceived the attractiveness of regional
and mid-cap banks, and have priced in to the big banks' share
prices the risks and uncertainties under which they labor.
Managements of the underperforming companies need to give financial
engineering a serious look because they cannot grow their way out
of the current situation. Nor can they cut their way to stellar
profitability. They should consider restructuring their capital in
ways that can be better appreciated by the market, giving their
investors the enhanced performance they seek.
Perhaps most importantly, the managements of these firms need to
listen to investors and clearly articulate their plans for
increasing shareholder value. Otherwise they risk becoming the
targets of activist investors - who aren't hesitating to take on
the big guys. Just look at Procter & Gamble (PG) for evidence
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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