Morgan Stanley (NYSE:MS) CEO James Gorman has stated that there is little likelihood of the federal government supporting a break up of the country’s biggest banks, reports WSJ. Gorman stated that he actually expects firms in the industry to get larger, as smaller regional banks consolidate in a bid to meet higher costs.
The statement is in direct conflict with the sentiment that the country’s largest banks would be worth more to their shareholders in smaller parts, rather than in their current form. Last June, Michael Price, who was a key figure in the formation of JPMorgan Chase & Co. (NYSE:JPM), publicly stated that to be his own belief.
Price suggested that according to his analysis, Morgan Stanley (NYSE:MS), Goldman Sachs Group, Inc. (NYSE:GS), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) were all undervalued, if looked at as a sum of their parts. Despite this, Gorman believes a break up is unlikely.
James Gorman made the comments at an investment conference earlier today. It is clear why his position should be that a break up of the country’s major banks would be a bad decision on the part of the government. It would reduce the ability of the institution he controls, Morgan Stanley (NYSE:MS), to influence the market.
Whether or not dismantling the banks would result in shareholders taking away greater value is entirely debatable. Michael Price, among others believes more value could be squeezed out of the smaller businesses. It is clear, however, that smaller banks wield less power, and a considerable amount of value is lost in that manner.
There is in the United States at present, a large proportion of the population that is firmly against the banking industry, blaming it for the collapse of the economy in 2008. Therefore a government program designed to reduce the size of the banks, and in the public’s eyes hurt them, could be very popular.
It is full of constitutional milestones and involvement in the banking industry at that level would more than likely drag up a great deal of conflict, particularly with a Congress in direct opposition with the executive power. Breaking up the banks would, at a federal level, be difficult and divisive.
On the other hand, the program could be accomplished at a state level, with New York’s Federal Reserve and regulatory bodies holding great sway over the financial industry, particularly after the bailouts provided to many of them in the wake of the 2008 crisis. It would still be a very difficult operation to complete successively.
Morgan Stanley (NYSE:MS) CEO is probably right in thinking that the government is unlikely to bring about a break up of the country’s largest banks in the near future. The process is daunting, and the benefits are not readily apparent.
It is more likely that the era of consolidation brought about by the most recent financial crisis will continue. Firms are currently being pushed by weak markets on all sides, and are struggling to thrive at a regional level.
This debate will continue, particularly if more shareholders come to believe that large institutions hide the real value of their investments. It would take only one courageous move by a large activist investor to change the reigning opinion. If they’re out there, they haven’t shown their face yet.