Source: The Big Picture
Shareholders Join Bankers, Economists, Financial Experts, Regulators and the American People In Calling for a Break Up of the Giant Banks
The president of the Federal Reserve Bank of Dallas, Richard Fisher, has long said that the component parts of the biggest banks would be “worth more broken up than as a whole.”
Last year, Crain’s New York estimated that Citi’s component parts are worth 40% more than Citigroup’s current market price.
Forbes’ Robert Lezner argues:
The proper solution obviously is to break-up the banks into their stand-alone parts. Without government pressure, voluntarily, strategically, with the proper stated purpose of benefiting the banks shareholders, who have not gotten anywhere near back to the price of the their shares in late 2006 or 2007. (C is selling at 5% of its peak price; BAC at 25%, GS at 60%) I’m told there are hints of this solution bubbling amongst the bank analyst fraternity.
Spin off the asset management division that manages several hundred billion of other people’s money into a public company that will have the multiple of a T. Rowe Price, or a BlackRock, which will have a transparent cash flow and sell at some price-earnings multiple higher than a bank today and behave according to the way the stock market behaves. It would be regulated by the SEC and be dependent on its own performance and not a bunch of financial activities with leverage that few can understand, much less put a dollar value on.
Then, spin off the consumer banking operation into a separate stand-alone business. Its profit margins will be transparent as the spread between the bank’s borrowing costs and the yield on the loans or mortgages it finances. I’d be willing to bet these operations, with more predictable earnings and a steady dividend would also sell at greater than 10 times earnings. These spin offs would be regulated by the Federal Deposit Insurance Commission (FDIC), which might well strongly suggest a cap on the leverage that can be used of between 10 and 15 times.
Thirdly, the wholesale banking operations, the collateralized loans, the derivative positions, the futures, puts and calls would be in their own unit. Investors and analysts and regulators would be able to evaluate these institutions more rationally, especially if they are forced to disclose more exactly what they are doing globally and with whom.
Now, analysts at even the giant banks themselves are starting to agree.
Bloomberg reported yesterday:
Shareholders at the biggest U.S. banking conglomerates may demand breakups if valuations remain depressed, according to analysts at Wells Fargo & Co. (WFC)
So-called universal banks such as Bank of America Corp., Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) are trading at a 25 percent to 30 percent discount to more-focused competitors, analysts led by Matthew H. Burnell wrote in a research report today. Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), which concentrate on investment banking, trading and money management, are within 8 percent of the estimated value of their parts, the analysts wrote.
“If regulators and/or legislators don’t demand it, shareholders could also intensify demands to ‘break up the banks.’ ”
Burnell’s team calculated that pieces of Bank of America are worth 41 percent more than their tangible book value, a measure of how much shareholders would receive if the firms’ assets were sold and liabilities paid off.
Citigroup should get a 24 percent premium, JPMorgan should get 69 percent and Goldman Sachs should be valued at 19 percent more than tangible book, the analysts said.
Citigroup, ranked third by assets and based in New York, and Bank of America, ranked second and based in Charlotte, North Carolina, trade at about 14 percent and 7 percent less than tangible book value, according to data compiled by Bloomberg.
JPMorgan, the biggest U.S. bank by assets, and Goldman Sachs, the fifth-biggest, trade for 28 percent and 9 percent more than tangible book value, respectively. The valuation for the two New York-based companies compares with the 281 percent premium fetched by Minneapolis-based U.S. Bancorp (USB), the nation’s largest regional bank.
New York-based Morgan Stanley should be valued at a 13 percent discount to tangible book value, compared with the current discount of about 19 percent, the note said.
Michael Mayo, CLSA Ltd.’s bank analyst, wrote in a separate note yesterday that shareholders in the biggest firms are more likely to agitate for changes than in prior years.
“Almost every large investor from our meetings and conversations over the past four months agrees that bank managements should be held more accountable and more often intend to vote against directors, compensation plans, and other actions,” Mayo wrote in an April 9 research note.
In a separate story yesterday, Bloomberg noted:
JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets and the top investment bank by fees, is questioning the so-called universal bank model’s future.
Top-tier investment banks are “uninvestable at this point with a risk of spinoff from universal banks,” JPMorgan analysts led by London-based Kian Abouhossein wrote in a research note today. They cited potential rule changes and curbs on capital and funding.
Who Wants to Break Up the Big Banks … And Who Wants to Maintain the Status Quo?
Financial experts, economists and bankers say we need to break up the big banks.
The overwhelming majority of Americans want to break up the giant banks as well.
Given that shareholders are now starting to understand that breaking up the giants would be better for their own portfolios, the power of the markets may finally weigh in to split up the too big to fail banks.
So who is is against breaking up the giant banks?
Apparently, the only people opposing a break up are the handful of welfare queens – er, I mean current top corporate brass – who mooch off the public to reap insane windfalls, and the bought and paid for D.C. politicians who make money hand over fist by literally pimping out the American people to their buddies.
And see this.
Source: The Big Picture
“The banks should give a full, fair, and accurate account of their financial positions and they are failing that test.”
-Kevin Warsh, former Federal Reserve Board member
“After serving on the [FASB] board, I no longer trust bank accounting.”
-Don Young, Financial Accounting Standards Board
“Do I trust Bank Accounting? Absolutely not.”
-Ed Trott, Financial Accounting Standards Board member
“There is no major financial institution today whose financial statements provide a meaningful clue” about its risks.
-Paul Singer, Elliott Associates
Source: The Big Picture
A gentleman named Jan Schildbach of Deutsche Bank (DB) has published a research report “Universal banks: Optimal for clients and financial stability; Why it would be wrong to split them up.” This report is remarkable for many reasons, but not because it makes a convincing investment case for mega banks. Rather, it proves that anybody can make a case for any proposition so long as one carefully avoids touching any inconvenient facts.
The TBTF banks are parasites that drain resources from society. This ridiculous, self-serving analysis by one of the most hideous examples of “too-big-to-fail” makes that point nicely. Indeed, as one reads the DB report, it is tempting to laugh – were the subject no so sad and so serious. Keep in mind that my firm, Institutional Risk Analytics, calculates Economic Capital and Risk Adjusted Return on Capital (RAROC) for all US banks. The RAROCs for the top US universal banks are usually ~ 0 or even negative, as shown in the table below.
Note that DB does not provide sufficient disclosure to the public to perform the RAROC calculations in the same way as for US banks. Note also that even Wells Fargo (WFC), which has no investment banking or OTC derivatives dealer operations, routinely delivers a RAROC that is barely in positive territory. And we are talking about Q2 2012 here; the numbers from before the crisis are even worse, reflecting the de-levering that has occurred since that time. What these numbers basically suggest is that all of the large, TBTF banks are consistent value destroyers using any rational measure.
Schildbach opens his discussion by saying that there are “key advantages of the universal banking model:”
1) Broad range of services for customers
2) Lower costs for customers and the real economy
3) Greater financial stability
The trouble is that none of these statements are true. More, if Schildbach bothered to look at the nominal and risk-adjusted equity returns of the large universal banks, he would conclude the opposite.
While the “too-big-too fail” banks such as DB, JPMorgan Chase (JPM) and Citigroup © do provide a wide range of services to clients, this is hardly a reason to support larger banks. The services provided by these behemoths are also provided by smaller firms, which tend to provide far better service. Large organizations tend to treat customers as statistics because, as we all know, there are no economies of scale in banking.
This point regarding the economic efficiency of larger banks is entirely missed by Schildbach, who states that:
“Universal banks are able to leverage revenue and cost synergies through economies of scale and scope. These benefits are passed on to universal banks’ customers and investors. Ultimately these benefits lower the costs of finance for society as a whole.”
But, again, this is completely wrong. Not only do large universal banks have lower nominal and risk-adjusted returns than smaller banks, but the periodic need to be bailed out by government renders the largest banks a nightmare for investors and the public. In the case of C and JPM, for example, these institutions require massive subsidies from the public that the DB analyst does not even mention in his report. Even in nominal terms, banks such as C and JPM have been consistent value destroyers. But when you start to reckon the risk-adjusted returns on capital for the TBTF banks, the net is negative.
Most of the earnings of the top four US banks, for example, are attributable to subsidized markets such as housing and derivatives. In the case of the former, the US government allows the big banks to earn supra-normal returns by originating mortgage loans that are several points below the market cost of credit. A 30-year fixed rate mortgage at 3% is about 3% below the actual cost of this loan because Uncle Sam takes first loss on the credit. The free market rate for a 30-year loan where a private investor takes the credit risk is about 6%, assuming a prime borrower and an 80/20 conventional mortgage. Far from providing a benefit to society, the TBTF bank is a net consumer of subsidies from the public in this case.
Or let’s look at the market for OTC derivatives, another market that is very important for DB, JPM and C. In this market, banks are allowed to continue trading even when a obligor defaults. In the US, the TBTF banks are exempt from the automatic stay in bankruptcy when it comes to OTC derivatives. This crucial exemption is worth tens of billions of dollars per year and represents a considerable subsidy from public and private investors to the big banks. Yet somehow the DB analyst misses this point entirely in his analysis. This is hardly a surprise since DB is one of the largest players in OTC derivatives in the world.
The next point made in this amazing document involves lower cost of funds. Mr. Schildbach states that TBTF banks are able to benefit their customers because of lower funding costs. And why do the universal banks have lower funding costs? Because these institutions are considered “too big to fail,” of course. When you grant a monopoly to a large bank like DB, for example, it is natural that the institution is going to have lower funding costs than smaller banks that are forced to fund independent of government subsidies. DB has a lower cost of funds than smaller banks because it is given preferential access to funding by the central banks and because it has a near-monopoly in its home market.
Just look at the bailouts coming from the EU nations to the bond holders of the largest banks and one thing becomes crystal clear: the more bankrupt the institution, the larger the subsidies for the bond holders. Bear in mind that I know the people who are handling bad asset sales for DB and the other German lenders, so let’s dispense with the pretense that these banks are even remotely solvent. In fact, the German government is orchestrating massive forbearance for all banks via the off-balance sheet liquidation of bad assets by DB and other domestic lenders.
This report is ridiculous on many levels, but the fact that it was published by DB, a profoundly insolvent large bank, speaks volumes about the true objective of the author. If you measure the tangible equity of the entire DB group vs. total assets, what is known as a leverage ratio, the bank has lower capital than any large US bank. Only the canard of capital to “risk weighted assets” brought to us via Basel III allows DB to keep operating.
But if you start to assign real risk weights to the OTC derivatives business inside DB, the picture grows quite alarming. In these terms, DB and the other large, “universal” banks of the EU are all arguably insolvent looking only at domestic asset problems but especially if you start to haircut capital to reflect bank exposures to Greece, Spain, Portugal and France. And yet somehow Mr. Schildbach and his colleagues at DB are able to publish a report making the case that universal banks like DB are a net benefit to the public.
At one point in the report, Mr. Schildbach actually states that “universal banks are beneficial to financial stability (and thus taxpayers),” this because of the flow of credit to large enterprises. The author somehow ignores the fact that all of the major universal banks in the EU are net recipients of subsidies at present. Indeed, on Page 10 of the report, Mr. Schildbach talks about the top banks in the FX markets and the important services they provide to customers. The only trouble is that many of these institutions are insolvent and are, in some cases, being liquidated by their host governments. Let’s take a quick look at some of the top names on the list:
The first name on the list, DB, is a ward of the German state. Without a steady flow of subsidies and forbearance with respect to bad assets by German authorities, the bank would have failed during the latest crisis. Citigroup is a ward of the US government after receiving a massive public bailout. Barclays is not dead yet but has a profoundly troubled franchise and problematic management team (LIBOR??) and is selling assets to keep itself afloat. UBS is retreating entirely from the US market and is being liquidated by Swiss authorities after repeated fiascos in the private banking and investment banking sectors. HSBC is likewise on the rocks and is retreating from a complete disaster in the US banking sector (Household Finance??). JPMorgan is nominally profitable, but is downsizing after the London Whale trading scandal. RBS is a ward of the state in the UK and is being liquidated. Like UBS, Credit Suisse is reeling from a succession of bad investments and management missteps. Morgan Stanley is just barely keeping its nose above water having seen its revenue base cut in half since the start of the crisis.
Overall, this DB report seems to be a feeble effort at public relations, not a true analysis of the financial and economic performance of the largest banks. The notion that the TBTF banks are providing a net benefit to society is laughable, yet that is precisely the key point made Mr. Schildbach over and over in his report. The only explanation that seems to make sense is that DB intended to publish this analysis as a PR piece, but somehow the wires were crossed and the report was instead published under the guise of serious research. In either case, the analysis is entirely unconvincing.
Source: The Big Picture
SAN FRANCISCO, CA – A new NerdWallet study found the 10 most profitable U.S. companies paid an average of 9% in federal taxes last year. These low rates are particularly shocking given that the official tax rate is 35%. The study also revealed more than half of the 500 largest U.S. companies paid a lower tax rate than the average American.
To give the public easy access to this information, NerdWallet built a tax rate transparency tool. The tool allows users to select any of the 500 largest corporations in America and instantly see the tax rate that company paid. The tool also provides the name and compensation of the highest paid executive.
Source: The Big Picture
Bungled Bank Bailout Leaves Behind Righteous Anger
Neil M. Barofsky
Bloomberg Jul 22, 2012 6:30 PM ET
Source: The Big Picture