Oh, now Elizabeth Warren is an expert on the stock market. "[M]any of the Wall Street banks right now are trading below book value," she commented at a Senate hearing last week. "And I can only think of two reasons why that would be so. One would be because nobody believes that the banks' books are honest, or the second would be that no one believes that the banks are really manageable."
Actually, there are a few other possible reasons banks are trading below book. I'll get to those in a minute. But first: can it possibly be true that after the banking industry has endured three straight years of federally mandated stress tests, four years of post-crisis independent audits, and more severe regulatory scrutiny generally, that Elizabeth Warren still believes the banking industry is cooking its books? How could they be? That would be one vast conspiracy! It would have to involve everyone from auditors, to regulators, to bank managements—all without anyone saying a word. The Trilateral Commission would have nothing on this crew. Alternatively, Sen. Warren might have lost her mind.
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The Internet was abuzz last week over video of Warren ripping in to regulators during a hearing of the Senate Banking Committee. She seems to feel there haven't been enough prosecutions that would "make an example" of banking industry wrongdoers, for the purpose of deterrence. That's an astonishing view. The Justice Department has spent the better part of the past four years trying to get the goods on some of the highest-profile names associated with the credit meltdown. They went after Dick Fuld and came away with nothing. They went after Angelo Mozilo and came away with nothing. They went after Kerry Killinger and came away with nothing. It could be—although Elizabeth Warren's view of the world is so blinkered that she'll never believe it—that while what Fuld, Mozilo, and the rest did might have been unwise and imprudent, it was not criminal. Considering all the time and effort the DoJ has spent looking into the matter, in fact, that would appear to be the case.
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But Elizabeth Warren puts on an entertaining YouTube show, just the same. I had assumed her bottom-line goal as a member of the Senate Banking Committee would be to ensure adequate oversight of a banking industry that would still be an important source of credit for the economy generally. That's entirely reasonable. But based on her harangue last week, it looks like I was wrong. All Elizabeth Warren seems to be interested in doing is bludgeoning the banking industry and the people who oversee it, just to play to her base. Thanks, Massachusetts!
Now back to those bank valuations, for a minute. First off, the vast majority of publicly traded banks do trade above book value. But among those that don't, one possible reason for the discount that Sen. Warren didn't mention has to do with the tremendous new regulatory load that Congress imposed on the banking industry, mainly via Dodd-Frank. This mountain of new regulations is making it difficult for some banks to earn their cost of capital. Those banks are trading below book value, therefore, because that book value will likely earn a paltry return and deserves to be discounted. It's not bad assets that are holding the bank stocks down. It's hyper-regulation—the kind that's been championed for years by Elizabeth Warren.