When Will the Banking Industry Clean Itself Up
I really don’t expect the banking industry to clean itself up. Back in the ‘90’s I was annoyed that they were considering permitting banks to expand. I was frustrated when the Glass-Steagall Act was repealed, and of course I was shocked when I read all the stories of what happened during the financial crisis. But I don’t think the banking industry will clean itself up. Sure they’ve made tremendous strides cleaning up their books, tightening lending, reducing risk, and controlling “rogue” traders (compared to their total risk), BUT until the executives are truly held accountable, and that includes firing them or reducing their pay significantly, I don’t think there will be enough progress.
I struggle to invest in banks, because I don’t understand them very well. I’ve tried to understand, but I can only make a lot of assumptions. There are so many complexities, I just hope that they are managing their money well. But I cannot invest merely on hope. I have to stick with companies I can understand (at least to a point). Sure, I will invest in the banks that appear to be healthier and doing reasonably well because I think I will miss out on great gains if I don’t, but it’s just not clear to me how they will make money and avoid major problems without taking on big risks that eventually blow up, either for the bank or for the broader economy.
Here are a couple great articles on this topic from the Financial Times. I like the opinion piece by Mike Mayo, because I know him personally, but I don’t think his appeal will significantly impact bank executives, thus I think the second article will ultimately be correct: Investors will demand change. After all, if you own stock in a company, you are one of the owners . . . and as an owner, I believe that eventually the owners will demand the change.
Act ahead of outsiders Mr Dimon
By Mike Mayo
Here’s another crucial distinction that gets lost in all the populist outrage: capitalism did not cause the financial crisis, or the problems in the banking sector since then. Instead, it was a distinct lack of capitalism: insufficient oversight, ineffective regulation and a void of accountability. Markets are effective at punishment – JPMorgan has lost more than $22bn of its market value since its trading loss – but less so at ensuring positive permanent change.
Instead, we need to hold the worst performers accountable. Look no further than banking’s Bermuda Triangle: Citigroup, Morgan Stanley and Bank of America. All three stocks have underperformed the S&P 500 by 75 per cent under the tenure of their current chiefs, but most investors have not said “boo”. They vote with their feet and the ineffective chiefs remain in place.
. . . Yet so far, we are still waiting and my fear is that nothing will happen even to the Bermuda Triangle. Is it any wonder that outsiders are threatening stricter regulation? Senator Sherrod Brown from Ohio wants to break up the big banks, with no differentiation for those with strong balance sheets, reasonable strategies, or track records of success. In this view, Wells Fargo, which has performed well lately, is no different from Citigroup, which has lagged behind for years.
Breaking up banks will win investor approval
By Sebastian Mallaby
Investors’ scepticism shows up in share prices. The stock market capitalisations of Citigroup and Bank of America languish at half and three fifths of tangible book value, respectively – liquidating Citi could hand shareholders a gain of 100 per cent. Indeed, because banks’ assets include infrastructure that could be sold for much more than book value, the bonanza might be even bigger. JPMorgan’s market capitalisation is roughly equal to its book value, but analysts reckon that the bank might be worth about a third more dismembered than intact.