Comment To TIME, Bank Shares Discount To Book, And Elizabeth Warren

Posted by Milton Recht:

The comment I posted on TIME Business & Money, "Mrs. Warren Goes to Washington: Does the Market Mistrust Big Banks?" by Christopher Matthews:

There is an alternate explanation. Congress and Elizabeth Warren.

Public companies including banks are worth the discounted value of their future earnings (more correctly would be their discounted future free cash flows, but both often move in tandem.) Bank shares traded above book value until around 2008-9 coinciding with the drafting and passage of Dodd–Frank Wall Street Reform and Consumer Protection Act. Banks have used the same loan loss, securitizations and derivatives on and off balance sheet accounting for many years, including years when their shares traded well above book value. It is only with the passage of recent federal consumer protection and financial reform that banks have traded below book value. A more likely explanation for the discount to book value is that the federal legislation is significantly increasing bank expenses while limiting the ability of banks to offset these additional costs through price increases and new products. The new federal legislation has decreased future bank earnings and the lower expected earnings have negatively impacted banking industry stock prices.

The discount to book value for banks should be called the Elizabeth Warren bank shareholder loss effect.