The Perma-Short Banks, a Sequel on the Future

by | Sep 25, 2020 | Corporate Governance | 0 comments

Earlier this week I published a column on five ways US banks outperformed their European and Japanese counterparts. Those included capitalization, efficiency, return of capital, governance and regulation / government interference.

But as we see the EuroStoxx bank index reach an all-time low this week, many in the market persistently suggest US banks are headed in the same direction as the hapless foreigners, so much so that it’s nearly conventional wisdom.

So the US is in better shape now, but is Pal right?

Today’s sequel answers that question by showing why US banks are the way they are, and why they will continue to run circles around Europe and Japan. We know that US banks return capital and Europeans don’t, but why? Why does JP Morgan spend hundreds of millions to lobby while Paribas does what they are told to do? Why do we see bad decisions cascading to the point the EU banks are trapped, trading at 20% of tangible book and with no choice but to merge, shrink, and deflate their host economies?

The answer is greed.

These problems develop when the 9-member Management Board of $1.5trn asset Deutsche Bank owns less stock cumulatively than the Chief Risk Officer of $17bn Independent Bank of Texas owns by himself. I’m confident that risk officer is one of thousands of officers in the US banking system checking their stock price daily.

9 guys who could care less what happens to the stock

Small banks in the US brag about how much insiders own. Management at Deutsche own 0.03% of a stock with a $13 billion market cap. Speaking of $13 billion, that’s the amount of dividends JP Morgan will pay this year, an amount CEO Dimon referred to as a “drop in the bucket”.

Gekko said “greed works” referring to corporate takeovers, but it also seems to work for banking systems.