Michael Price

America’s largest financial institutions are some of the most widely followed stocks in the market. Because of the wide and varied information available on them, it seems unlikely that their value is wrong in any significant sense.
The swing in value of the large banks is usually based on macroeconomic swings and investment realities, and the sector will, in general, grow along with the sector.
One investor is willing to counter that. Michael Price, who was instrumental in the conglomeration of the banks that eventually formed JPMorgan Chase & Co. (NYSE:JPM), thinks the major banks are undervalued.
The major behind the low valuation, according to the maven, is that the banks are simply too big. Looking at the price of the shares of five of the United States’ biggest financial institutions. His list is comprised of Goldman Sachs Group (NYSE:GS), Bank Of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Morgan Stanley (NYSE:MS).
Price believes his sum of parts analysis shows that those banks, piece by piece, are worth much more than their current market capitalization suggests. Price believes that the maximum value can be gotten for shareholders by breaking up the banks.
Price has been following this line for some time. Last year, at the Ira Sohn conference, he asserted that Goldman Sachs was undervalued based on the same sort of sum of parts analysis.
His view is becoming ever more widely held among Wall Street commentators. The banks are now undervalued and the market can clearly see that they are. Despite that, there have been no corrections in the stock prices. That means the market is unwilling to put the true value on the assets and so keeps shareholders’ holdings weak.
Breaking up the major banks is something the market is clearly not going to do by itself. It would require some kind of regulatory punishment for maintaining financial services in so many sectors, or to a high value. Increased regulation of that type is something most politicians would be unwilling to pursue.
A secondary reason to allow the breakup of the major banking conglomerates is the eradication of the hated “too big to fail” argument. Both the market and the public have been frustrated with arguments made on this front since the earliest financial troubles in 2008. Breaking banks into smaller pieces would reduce their structural importance.
The low valuation of the banks that engage in excessive variation in activities displays the markets antipathy toward them. It is unlikely to lead to a split in any of them, however. It will take a concerted effort by either governmental authority, or a cartel of powerful investors to cause a break up in any of the major banks.
The valuation of the banks means that buying a majority in any of them is a difficult task for even the most well funded investor. It would take an agreement on common goals to change the sector.
That seems unlikely to happen in the current economic atmosphere. The restructure would be a lengthy task, and would open investors up to many vulnerabilities and a much greater risk. At the moment the reward does not seem to equal the challenge.
The market says that American banks are less valuable as a whole than they would be in parts. there will be little opportunity in the near future for the market to correct this valuation, because the risks involved are bigger than almost any investor is willing to take. The day of the financial merger is over, once the world returns to some form of financial stability, a period of financial splits may begin.