An Investment Case For Glass-Steagall

BAC Price / Book Value data by YCharts

Since 1999, when Gramm-Leach-Bliley basically repealed the old Glass-Steagall Act, banks, security companies and insurers have become one.

This is reflected in the economic dominance of a few money center banks, primarily JP Morgan Chase (JPM), Bank of America (BAC), Citicorp (C) and (most recently) Goldman Sachs (GS), which was forced to become a bank holding company in the 2008 economic collapse.

The leaders of these banks, and their regulators, insist that this immense size is a virtue. You can even hear it in their commercials, especially one for BofA's Merrill Lynch unit, with a cow wandering back-and-forth while an announcer talks about its financial strength.

But what investors see in that commercial is a lot of hamburger. Moody's, for instance, has once again moved to downgrade the paper of the two weakest of these banks, BAC and C. There are fears of another wave of job cuts.

The problem, as many commenters at Seeking Alpha will tell you, is that no one knows what these banks are really worth. How many bad mortgages do the deposit-taking banks still hold? What kinds of derivative contracts do the investment banks still carry? Can this mess really be untangled?

As a result, investors have been fleeing these banks in droves. As the chart from Ycharts shows, none of these banks are currently trading anywhere close to their book value. Citigroup and BofA, the sickest of the bunch (in the opinion of investors) haven't traded at book since the economic collapse, and are now trading at discounts of about 60%.

Too big to fail has become, in the minds of investors, too big to trust. And too big to succeed.

Imagine the value that could be unlocked if these banks were now broken up. It's certainly possible that more financial sludge could be uncovered in that process. But the fear of that sludge has now become more powerful than the sludge itself, and knowing would provide a financial benefit.

It wouldn't take an act of Congress to do this. It would simply take a little courage on the part of a bank's board of directors, that the best way to realize the full value of the bank's assets would be to separate what is backed by deposits from what is backed just by the bank.

The result of such an exercise would be two-fold. Most important is it would unlock value. But also it would increase trust in the banks, both on the part of investors and depositors, and without trust a bank is worthless. Or, at least, worth less than it is worth.

There are cynics who insist that this can't be done. There are many observers who believe that there is so much glue and bailing wire holding these banks together that even trying to untangle them would cause them to collapse, and with it the banking system, and with it the government.

But what's happening now is that smaller banks are growing stronger. Smaller brokerages are stealing the industry's best talents. The big banks are, in a very real sense, slowly withering away. And with them, the strength of the American economy is withering away.

So isn't it time to unlock the value? Or at least see what's real?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.