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A well-known Wall Street firm is urging Citigroup to split itself in two for the benefit of investors, adding to the chorus of calls for the biggest banks to be broken up. How much of a difference will it make?
March 21 -
The "too big to fail" debate raises a critical question that is seldom asked, much less answered: Do megabanks serve a critical function that justifies their undeniable risk to the financial system?
March 8 -
JPMorgan Chase chief Jamie Dimon added to his defenses of megabanks, arguing that regional and community banks rely on them. The comments could inflame tensions among banks instead of easing them.
February 23 -
PL Capital is raising money for a new fund that'll target banks with up to $75 billion of assets, after 20 years of sticking to just community banks with less than $3 billion of assets. In this Q&A, Richard Lashley explains why activist investors are eyeing bigger banks now and how banks can avoid his kind.
January 31 -
Activist investors are turning their sights back toward banks after going easier on them than on other industries in recent years. Look for the next bank M&A wave to be fueled by aggressive hedge funds as they push for board seats and ultimately sales of financial institutions.
January 31 -
A rush of bank M&A is welcome news to activist investors, who typically make money when banks make improvements and sell to bigger institutions. Here is a look at six firms that have stood out in recent years for pressuring management teams and boards to enhance value for shareholders.
January 31
Calls to break up the big banks have
If size truly justified the heft of the Big Four, then they should have superior operating and share price performance. Yet only Wells has generated a return on equity consistently above its cost of equity since the financial crisis. The bank's stock price trades above book value, albeit below its pre-crisis level. JPMorgan's recent results show ROE equal to its cost of equity. Its stock price trades around book value. Citi and Bank of America have failed to cover their cost of equity since the crisis. Their stock prices trade at less than 70% of book. Thus, except for Wells, the alleged benefits of size and global scope have failed to translate into superior performance at the Big Four. The real issue is why these banks and their boards continue to cling to underperforming legacy assets and business models, which depress returns and value. Perhaps it reflects the absence of market challenges to weak internal governance.
Ordinarily, capital market discipline represented by activist investors would surface to question underperformance at public firms. Activists would confront management and their boards with strategic changes to improve results and share prices. Examples include Carl Icahn's efforts at AIG. Activism, while increasing at some smaller institutions, faces significant regulatory barriers.
The primary source of the barriers is the
These restrictions act as a de facto poison pill discouraging potential activists from accumulating, either alone or acting in concert with other investors, a large enough ownership position, usually 1% to 5%, to challenge bank managers. Avoiding being deemed in control frequently requires signing
This is why recent breakup proposals by
Active, not passive, shareholders are needed to drive the required changes in strategic direction. This requires reducing the regulatory barriers to shareholder activists. An important first step would be a less restrictive interpretation of control requiring passivity under the law. For example, regulators could grant activists interim exemptions from the Bank Holding Company Act while their challenge is unfolding. Regulators would still retain approval rights concerning any proposed changes including capital plans and other fundamental changes. The increased risk of activism itself would introduce capital market discipline, letting market forces take effect without the need for difficult-to-pass new laws.
Failure to reduce regulatory barriers to activism simply prolongs the "too big to fail" problem for taxpayers and shareholders.
J.V. Rizzi is a banking industry consultant and investor.