Mike Mayo: Bring Back Michael Price and Break-up C and MS

Updated on

Mike Mayo: Bring Back Michael Price and Break-up C and MS

Mike Mayo, analyst at Credit Agricole Securities, spoke with Bloomberg TV’s Betty Liu and Adam Johnson today about Sandy Weill’s comments and said that Morgan Stanley’s (NYSE:MS) stock could be worth “$16 to $32” a share in a breakup.

Mayo said that short-sellers betting against Morgan Stanley would be “blown to Neptune” if the bank if split up.

On Weill’s comments today, Mayo told Bloomberg TV that, “I mean the person who created the animal now wants to kill the animal. What a shock.”

Mayo on Weill saying that big banks should be split up:

“I mean the person who created the animal now wants to kill the animal. What a shock…One other point that Sandy Weill made was that he said that the world has changed so therefore we need to break up the big banks. I vehemently 100% disagree with Sandy Weill. The world has not changed. The same ill-conceived misplaced incentives that were in place a decade ago, literally when Sandy Weill was CEO of Citigroup, are still in place today.”

On Morgan Stanley:

“I upgraded Morgan Stanley stock for the first time since before the financial crisis at the end of last week. So when Morgan Stanley had pitiful earnings for the second quarter—they were awful—I upgraded the stock on that news, saying either Morgan Stanley has to perform better or maybe they need management changes. They say they are going to restructure their fixed-income division. I’m not sure they are doing it fast enough, but if they…reduce the amount of capital involved in that business. The trading and investment banking businesses are worth half of Morgan Stanley. If you were to free up half the capital, two-thirds of the capital…dramatically shrink. Take out excess capacity in the fixed income business. If they did that, even a little bit more aggressively than they said they would do, the shorts would be blown out of the water at Morgan Stanley. The shorts at Morgan Stanley would be blown to Neptune.”

“By the way, this is not a tough call. I think the sum of the parts at Morgan Stanley is $16 to $32 a share. Right now, I think it is $13. My price target is at the bottom end of that because I don’t have anyone being an activist, but going from $13 to $16 is ok. The high side of that is $32. You break up the big banks, at least in the case Morgan Stanley, I think investors would be huge winners. I hope they can achieve this value on their own without a breakup, but they don’t have forever. For me Morgan Stanley is a test case. There is so much unrealized value there. What about Citigroup? What about Bank of America? Those three banks under the current CEOs are the worst performing bank stocks around. I call them the triangle of tragedy. Either perform better or let’s think about restructuring and breaking them up.”

On why he thinks Weill’s mind has changed:

“I think you have, number one, legacy issues. He did create this conglomerate, it has performed horrifically, and now he’s saying that there is another way. I think Citigroup has had a huge share of problems. For every $3 Citigroup made the last decade, they gave $1 back due to some kind of risk mishap. And now you have on top of that, you have the LIBOR scandal. Citigroup was named in one article yesterday in the Wall Street Journal, if Citigroup is implicated with the LIBOR scandal on top of the financial crisis, on top of Enron and WorldCom and everything else that went wrong in the last decade, at some point there is a tipping point where even Sandy Weill, the creator of the modern day Citigroup, says enough is enough.”

On whether Weill has a prerogative to change his mind since the environment has changed:

“We are at the two-year anniversary of Dodd-Frank last week. We are at the 10-year anniversary of Sarbanes-Oxley. News flash, memo to the White House and Congress, the banking system is not fixed despite all of these new laws and regulations. Dodd-frank is 2,000 pages. It could be 10,000 or 100,000 pages. It is still not going to fix the situation. The overseers are still paid by those they oversee. Whether it’s the accountants, ratings agencies, regulators with revolving doors, deferred compensation, the politicians, wall street, and others are still paid by those who oversee. We need to go back to the oversight we had before 1990, back to the days when Paul Volcker was the Fed Chairman. We need some Volcker-like oversight.”

“This by itself doesn’t change things but it does give some extra momentum to those regulators and perhaps to some investors who would like to see the big banks broken up, at least in the case of Citigroup Inc. (NYSE:C). If you cannot perform in the major leagues over a decade, then it is time to go back to the minor leagues. It might not be true for all banks. Wells Fargo & Compan (NYSE:WFC) has performed fine. But in the case of Citigroup, I agree with Sandy Weill 100%. Citigroup should be broken up.”

On what it would take for him to change his call on banks:

“This break up the bank theme would be extremely positive. I think the banks would be easier to manage and understand. Right now the biggest banks are not only too big to manage, regulate and fail, but they are also too big to understand. Let’s break off the big underperformers into pieces that are easier to manage. It would also reduce the new regulatory requirements with everything coming out of Washington and Basel, Switzerland.   That would be easier, too. The break up the bank theme. We need Michael Price to come back. Remember Michael Price from the 1990s? He encouraged Chase in the first place to merge. We need someone like that to come back.”

On who will prompt CEOs to break up the banks:

“Well you have two choices, either the investors step up to the plate and take responsibility as owners, or the regulators will come in. If the investors don’t do it, then the regulators will be more harsh. But we had leading up to the financial crisis, neither the investors nor the regulators were doing their job. So you had a void of accountability. No one was minding the store. Despite all the new regulations and laws, I’m still not sure people are really minding the store. We need investors and I think shareholder rights is at a tipping point.”


Leave a Comment