Big banks should start considering their shareholders and look at options that might be uncomfortable such as spinning off businesses, Phil Purcell, the former head of Morgan Stanley, told CNBC’s “Squawk Box”on Thursday.
“Shareholders of financial firms got punished big time 2008, 2009,” he said. “So my argument is those managements, those boards of directors, ought to get more shareholder oriented, they ought to be willing to do things that aren't comfortable and they ought to deliver.”
Purcell noted the banks like US Bancorp and Wells Fargo that do not have investment banks and trading operations are trading at a significant premium to universal banks like Citigroup and Bank of America . Regionals banks are trading at 1.5 times book, while the bigger banks are trading at half to 60% of book value.
“To me the shareholder is getting cheated,” Purcell said. “The banks trading at half of book, they should consider spinning off some of the businesses that you know would sell for 1.5, 2.5, 3 times book.”
Purcell said he is advocating tax-free spinoffs if shareholders are not being rewarded. This means a company will spin off a unit into a new company, the shares of which are distributed to existing shareholders. The parent company pays no capital gains but would if it sold the unit outright.
The former Morgan Stanley exec pointed to that firm’s decision to spin-off Discover , the credit card business, in 2007. Discover card at the time was 17% of the value of Morgan Stanley, he noted. “If you held on to your Morgan Stanley shares and Discover shares from then to now, Discover Card is worth quite a bit more, 20, 25 percent more,” he said.
“That's tremendous shareholder value.”
Citigroup has a credit card company three times as large as Discover. Purcell said, “If it was spun off, it would be $60 billion, if it traded the same as Discover. Citi only sells for $97 billion.”
Purcell also weighed in on the regulatory environment for banks. He said that the Securities and Exchange Commission under Arthur Levitt changed the results on how banks reserved for losses, which ultimately led to pro-cyclical policies. (Read More:Dodd-Frank Won't Prevent Another Financial Crisis: Pros.)
“Instead of over-reserving in the good times and under-reserving in the bad to cushion the blows, they changed the accounting rules so you do just the opposite,” Purcell said. “In the good times you reserve nothing. In the bad times you have to over-reserve. That's why the banks in the last couple years have been emptying reserves.”
“Hopefully as time goes by, cooler heads will come back and we'll go anti-cyclical with our reserve policies,” he added.
Banks are also in a stronger position to lend these days, Purcell said. “Not only did they double their equity, they have reduced leverage. So they have enormous capacity to lend money if businesses want to borrow it.” (Read More:The World's Safest Banks.)
Purcell believes banks could be a big part of the catalyst to get the economy going, but they can’t do it alone. “They can’t force people to borrow money,” he said. “Businesses have to decide if they want to do it.”