Wednesday, October 3, 2012

Why Global Banks Should Be Unbundled

During the real estate boom global banks were valued at 3 times their equity and their balance sheets responded with a similar increase in assets.  Today investors value global banks at a fraction of their equity.  One dollar of equity is worth 50 cents of value.  The global banks have moved from value creation machines to value destruction machines.

The collapse in the valuation of global banks is explained by their legacies and by prophesies about their future.  Investors are concerned about overvalued assets still on their balance sheets that have not been written down to the market value.  They also have problems evaluating their business models.  The banks have so many franchises that they have become too complex to value.  They are not only too big to fail, they are too complex to value.  Perhaps unbundling their franchises might make them more easy to value.  Instead of building reserves they might go back to their primary job of allocating assets to their most productive uses.

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