Eideard

Daylife/Reuters Pictures used by permission

America is downsizing. Whether it’s the food we eat, the cars we drive, or the houses we live in, Americans are concluding that smaller is better. Even U.S. corporations are starting to see the benefit of more Lilliputian institutions; the impending — and widely hailed — breakups of McGraw-Hill and Kraft are two examples.

So what about banks? It would surely be in the government’s interest to downsize megabanks. Sen. Sherrod Brown (D-Ohio) continues to push his bill to split apart the largest institutions. Regulators have new authority to order divestitures under the Dodd-Frank financial reform law. From a shareholder standpoint, government breakups have a pretty good outcome. It worked out well for John D. Rockefeller, whose shares in Standard Oil doubled after it was ordered to break up. Ditto for those who owned stock in AT&T.

Yet with gridlock in Washington, don’t count on politicians for a solution. Shareholders, however, have an interest in demanding that big banks split apart. Comparing the valuation for the supersize banks – Citigroup, Bank of America, and J.P. Morgan Chase with their simpler, leaner competitors isn’t pretty. Price/earnings per share for the supersizers averages 5.8, compared with 8.1 for smaller, more focused Wells Fargo and 8.1 for the bigger regional banks like U.S. Bancorp and PNC. More telling is the ratio of share price to tangible book value. For the supersizers, the average is 72% of book, compared with 165% for Wells and 142% for the big regionals. Chase’s strong performance holds up the average for the supersizers, but even its price to book is only 110%…

Supersizers argue that their scale is necessary to meet the financial needs of multinational corporations. But it’s not clear that multinationals find it advantageous to do business with a handful of financial titans. Dealing with smaller, more focused institutions provides specialized expertise and less risk of conflicts. If there were really that much value in supersizer services, presumably it would show up in shareholder returns. But it doesn’t…

So, shareholders, get ye to the boards that represent you and ask them loudly about whether your company would be worth more in easier-to-understand pieces. The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well.

Regular readers know that I would vote for Sheila Bair for President of the United States – even if she ran as a Republican. I don’t have to worry about that because [1] she doesn’t want the job and [2] the Republican Party is led by idiots who would never support her. She might take the job as Secretary of the Treasury, someday – and the Kool Aid Party would oppose that, too.

Don’t confuse her criticism of “too big to fail” with two other aspects of national financial policy. When push came to shove – even where we might not agree on which financial institutions should be offered aid or not – what was offered was loans which have mostly been repaid with interest. A profit to US taxpayers. The same is even more true for the auto industry. The motivation had more to do with structural importance to the US economy. The result has been more dynamic, a healthier marketplace and, again, we’re being paid back at a profit.

In strikingly unenthusiastic fashion, federal Judge Jed Rakoff signed off on the Securities and Exchange Commission’s plan to fine Bank of America $150 million after failing to tell shareholders of about $16 billion in impending losses at Merrill Lynch.

“While better than nothing, this is half-baked justice at best,” wrote Mr. Rakoff in his ruling released Monday, a week before the case was scheduled to go to trial. “The amount of the fine appears paltry.”

The judge wrote in his report that his court was “shaking its head” and that, based solely on the merits, the settlement between the SEC and BofA should be rejected as “inadequate and misguided.” Yet he elected to go along with the SEC’s proposal, citing deference to the authority of regulators and adding that federal judges should be wary of the “power to impose their own preferences…”

The judge’s ruling also seems like a final slap at the reputation of the SEC. The federal agency was prepared to accept a $33 million fine from BofA last year until Mr. Rakoff rejected that settlement.

In the end, the judge signed off on the $150 million penalty—equal to about 3% of BofA’s pretax income last year—by citing a distinguished soothsayer and baseball player. In considering the tortured nature of the BofA case, the judge quoted Yogi Berra, who is said to have said: “I wish I had an answer to that because I’m getting tired of answering that question.”

In other words, everyone’s favorite cronies at the SEC are still taking care of their country club buddies. They’re just getting better at covering their tracks.