A spectacular article by Investorsconundrum: «How much is a bank worth today?». I think it’s worth mentioning, by way of memes, all of us who work in this field and write about it should give some thought to the possibility that the global financial solution may lie in minimising the stock market value of banks. The dichotomy between a capital increase and the state plugging financial holes could be the difference between a fall in value for shareholders or for depositors (customers). But beyond this dichotomy of future solutions—whether viable or not—let us reflect on some factors affecting the valuation of banks in the current situation.I hope that, following on from Marc’s post and this or other memes, various bloggers will also share their views and discuss the future value of banks and their impact on the crisis. Some have already done so brilliantly, such as Gurusblog. And it would also be very interesting if Echevarri, Marc Vidal, Fernan2, FuturFinances, Unience… (to name but a few who are still active), and a long list of other illustrious figures, both well-known and lesser-known, did the same. Now let’s get on with our thoughts on the matter:
If banks are worth whatever someone is willing to pay for them, then clearly they are not worth zero today. Obvious, yet unsettling. The market – that is to say, we – generally cannot, at present, conceive of a world without banks unless we make the (futile) effort to imagine how our great-grandfathers lived when they were courting our great-grandmothers. And that very difficulty in imagining a world without banks already increases their value, whether calculated on an accounting or fundamental basis. We are prepared to pay more for them than they deserve because of our anchor in a multi-generational system that is inconceivable without the banking sector. Is the value we mentally ascribe to it irrational, or is it irrational to think that its real value is zero?
We can also attribute a different kind of value to them. For example, the fact that always have managed to reinvent their business for as long as anyone can remember (with banks, of course). This argument is literally priceless. To explain what I mean more clearly, let’s watch an extract from the following video: Jurassic Park in which, even though rationally speaking the chances of the dinosaurs reproducing uncontrollably within the park’s controlled environment were nil, as the mathematician played by Jeff Goldblum says: «Life finds a way». In this case, we could say that ever since the financial system as we know it came into existence, and despite the various difficulties, «the banking sector has managed to forge ahead».
For various reasons that are probably beyond our understanding today, traditional banking will be restructured in such a way that it manages to endure over time as a strategic and dominant sector. Therefore, if we agree on this, that resilience – or ability to rise from the ashes like the Phoenix, has an intrinsic value that may keep bank share prices above reasonable levels in the near future.
«When the time came for him to die, he would…’ nest spices and aromatic herbs, he added just one egg, which it incubated for three days, and on the third day it burst into flames. The Phoenix was completely consumed by the fire and, as it turned to ashes, the same Phoenix—always unique and eternal—emerged from the egg. This happened every five hundred years.»
It seems quite reasonable to me that the near-total collapse in the value of bank shares could be a solution for absorbing the global shortfall over time. But it is not the only solution, and perhaps not the least traumatic one either. That is another possible reason why they might remain significantly above zero. We do not need banks to fall to zero or near-zero value whilst governments – that is, all of us – retain a certain capacity to absorb shocks, deficits and toxic assets, or simply the ability to postpone the problem through inflation (Rescue Me) and «credit revival».
Not only is that scenario unnecessary, but our view of the banking sector is not objective. In other words, most of us are directly or indirectly involved in banks’ balance sheets, either through assets or liabilities. Our assets are their assets, and will remain so for at least a generation. The credit excesses that caused the bubble – which in turn have led us to consider whether the value of banks should approach zero – have left us up to our necks in debt to them, and it could not be otherwise. We can therefore hardly have the objectivity to value them that we might have with any other listed asset, such as a factory (KO o AAPL) or a distribution company (WMT). With these companies, we can indeed aim to determine their intrinsic, fundamental value and compare it with the value currently assigned to them by the market. And even then, only the privileged They make money from it on a sustained basis. In contrast, our money, most of our property and our hopes and dreams depend on the banks. And that could well be worth a subjective overvaluation, whether conscious or unconscious. At this point, we are reminded once again that: If banks are worth whatever someone is willing to pay for them, then clearly they are not worth zero today. Obvious, yet unsettling.
Another possible reason why banks retain a value higher than they might rationally deserve is the fact that they deal in something that the whole of the First and Second Worlds need: Money. Let’s say they sell, market and – I would say – often traffic in an item whose market share is 100% across the entire planet, with the exception of the Third World, where hunger and destitution shamefully take the place of money. Only in that extreme case of poverty are the inhabitants not potential customers of the banking sector. The rest of the world certainly are, without exception. And we become even more dependent the more wealth we create, whether it be virtual or real. That, then, together with the other arguments we have mentioned in this article, is the goodwill by far the largest on the planet («a set of intangible or non-material elements of a business that represent value to it»).
Furthermore, the political decision for us all to work together to revive the financial institutions that are already wandering the globe looking like zombies in the truest sense of the word Thriller, is taken. The damage caused by the death of Lehman Brothers was the catalyst for a firm, global political decision: Never Again. Without that political decision, the price set by the banks – by all of them – would probably be no more and no less than that of LEH, which, in peacetime no Take a breather. That’s half a dozen $ cents per share. The difference between its share price and that of the other banks should not be sought so much in their balance sheets – all of which are infected by the same virus – but rather in political decisions and arguments such as those we are setting out in this post. Intangible, abstract, irrational arguments that are difficult to grasp… call them what you will, but their effects are evident to this day. Would it not be reckless to ignore factors such as those mentioned when assessing how much a bank is likely to be worth in the near future?
It is also worth noting that all these considerations are based on a scenario without panic; for if panic were to set in, bankruptcy would set in even before share prices had time to hit rock bottom in their free fall.
Perhaps we simply need to give it time to see the banking sector’s market capitalisation drop to zero, and to regret not having been able to capitalise on the opportunities that would have arisen had we analysed events rigorously, as Investorsconundrum does. But if we accept that The current situation is more chaotic than it was a year and a half ago, all these arguments – which are difficult to assess – must be given greater prominence in our feeble and endemic attempts to predict the future. My first instinct is to agree with you, Marc. But if we are to write, reflect and offer our readers something more, I believe we must not underestimate the arguments mentioned.Congratulations, Marc, on your courage. It’s clear that you’ve made us think and write about something that many of us had vetoed on grounds of liability in the subconscious. That’s all I have to say. Now it’s over to you to decide and have your say.
Do your best to keep up appearances, and the world will give you the benefit of the doubt on everything else.