Bank of America Corp (BAC), Citigroup Inc. (C): After Lehman, This Problem Has Only Gotten Worse

One might have hoped that such a cataclysm would have served as a useful lesson for bankers, regulators, and politicians, but, in a wonderful article published in the Financial Times titled Insane financial system lives post-Lehman [sign-up required], Gillian Tett points out six anomalies that persist in the post-Lehman era. Here’s the one I find most striking:

“The big banks are bigger — not smaller. When Lehman collapsed, there was outrage over the fact that many western banks had become so enormous they were “too big to fail,” creating concentrations of risk. Reformers called for banks to be broken up, to make them smaller and create badly needed diversity. Some financial officials, such as Richard Fisher of the Dallas Fed, continue to demand this sensible step. But, as the investor Henry Kaufman points out, the banking world, especially in the US, has become more concentrated than ever. That is unnerving, particularly since no one knows how regulators would ever shut down a really big bank.”

I continue to believe that the top three universal banks, JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) offer value at current levels. The most expensive of the three stocks, on the basis of price-to-tangible-book-value multiples, JPMorgan Chase & Co. (NYSE:JPM), trades at 34% premium to its tangible book value. (Citigroup Inc. (NYSE:C) still trades at a 5% discount!) Nevertheless, it’s always worth examining the opposite opinion, and Tett highlights one risk factor that may help explain why these banks continue to trade at substantial discounts to their historical multiples.

The article 5 Years After Lehman, Banking Has a Bigger Problem originally appeared on Fool.com and is written by Alex Dumortier, CFA.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup Inc.

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