Break up the banks, even Goldman

By Roy Smith, Kenneth Langone Professor of Entrepreneurship and Finance & Professor of Management Practice

Roy C. Smith

Based on changing markets and increasing regulatory pressures, it is time to unwind the mega-banks into smaller, simpler, less risky business models.

September 5, 2011 -- Fears of recession, tough trading conditions, an ocean of unresolved litigation and the worsening eurozone mess have delivered a real pounding to bank stocks this summer, with the top 10 global capital markets banks losing approximately $200bn in market capitalisation since July 1.

Their average ratio of share price to book value, the real measure of success in banking, is now a dismal 0.63.

Mid-year results, following a declining year-long trend, produced an average return on investment of 9% versus an average cost of capital of 13.2%, or an “economic value added” of minus 4.2%.

Bank of America, Barclays, Citigroup, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS all experienced negative EVA. Not so surprising, perhaps. But what is Goldman Sachs, the prince of investment banks, doing among this group of underachievers?

Read full article as published in the Financial News.