The Only Reason To Buy Citi Or Bank Of America

 |  Includes: BAC, C
by: Dana Blankenhorn

Break-up value.

There is reason to believe this will be realized.

First, there are the politics. As rage grows over what was done to keep these companies afloat at the end of 2008 there may be no better way to deflect it than a break-up.

Second, as central bank policy remains accomodative there may be no better time to contemplate the parts rather than the whole.

Both banks carry the same ingredients:

  • Regulated banking entities that collect insured deposits.

  • Unregulated brokerage entities that trade for their own and customer accounts.

  • Credit card units that could easily operate independently of the parents.

  • Mortgage units that could be split off.

What TARP and the other Federal Reserve actions have done is to allow writedowns of non-performing loans and allow the parent companies to reduce bloat throughout their operations. Bank of America is in the process of laying off 30,000 people. Citigroup just announced another job cut, this time 3,000.

These cuts and downsizings are flying under the radar. Voters are actually happy about seeing bankers get some of their own. But the result will be a solid balance sheet for the whole operation, and billions of untapped value.

Moves toward a break-up would also give policy-makers of either party the maneuvering room needed for new regulations. One set of rules for those with guaranteed deposits, another set of rules for those without such guarantees. Limits on trading and leverage, imposed globally, through the Financial Stability Board. New rules on writing mortgage to assure portfolio quality.

The result could be an immense amount of innovation. It could be an immense new playing field for private capital. It would mean an enormous amount of competition.

The parts are definitely worth, in sum, more than the whole in both these cases. Once we see some clarity on how regulators might respond, I might be inclined to bet both stocks. Until then I wouldn't recommend you bet on anything but the bonds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.