Sanford “Sandy” Weill, whose creation of Citigroup Inc. ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said it’s time to break up the largest banks to avoid more bailouts.
“What we should probably do is go and split up investment banking from banking,” Weill, 79, said yesterday in a CNBC interview. “Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”
Weill helped engineer the 1998 merger of Travelers Group Inc. and Citicorp, a deal that required repeal of the Depression-era Glass-Steagall law that forced deposit-taking companies backed by government insurance to be separate from investment banks. The New York-based company became the biggest lender in the world before taking a $45 billion taxpayer bailout in 2008 to avoid collapse.
Weill joins regulators, investors, analysts, former bankers and lawmakers in calling for the break-up of too-big-to-fail banks to unlock shareholder value and prevent another financial crisis.
“There is finally a growing recognition among a wide range of market analysts, financial market participants and policy makers that the repeal of Glass-Steagall was a mistake,” said Thomas Hoenig, a Federal Deposit Insurance Corp. board member and former head of the Kansas City Federal Reserve. “It’s time now to restrict banks to core services.”
Rep. Brad Miller, a Democrat from North Carolina, has introduced legislation that would cap the size of the biggest banks.
“There are very credible establishment voices now saying we really gain little if anything from the size and complexity of these banks,” Miller said in an interview. He said he doesn’t hold out much hope the Republican-controlled House of Representatives will take up his bill, meaning any breakup would be up to shareholders taking the initiative.
Arthur Levitt, a former business partner of Weill’s who was chairman of the Securities and Exchange Commission when Citigroup was created, said Weill was “largely responsible” for the rollback of Glass-Steagall.
“He fought very hard for it, and really what Sandy did was to take advantage of regulators who weren’t and still aren’t doing their job,” said Levitt, who is a member of the board of Bloomberg LP, the parent of Bloomberg News.
Levitt said he regrets supporting the bill that overturned Glass-Steagall, and didn’t realize “how weak a job as regulators the Fed and Comptroller’s office were doing,” referring to banking oversight by the Federal Reserve and Office of the Comptroller of the Currency.
David Knutson, an analyst with Legal & General Investment Management, said it was hard to believe Weill, “the shatterer of Glass-Steagall,” has now changed his mind. “He enjoyed the benefits of the demise of Glass-Steagall and only now has he become remorseful? Where was he five years ago?” said Knutson, whose firm owns bonds sold by Citigroup and JPMorgan Chase & Co., now the biggest U.S. bank by both deposits and assets.
Directors of Citigroup paid Weill about $1 billion, including stock, during his 17 years as CEO, as he assembled a behemoth with operations across the world that offered investment banking, trading, commercial banking, insurance and consumer finance. He left the board in 2006.
Taxpayers rescued Citigroup in 2008 after losses tied to subprime mortgages threatened the financial system. Bank of America Corp. also accepted a $45 billion bailout while JPMorgan and Wells Fargo & Co. each took $25 billion. Goldman Sachs Group Inc. and Morgan Stanley were given $10 billion apiece.
“We can have size and scale but it doesn’t have to be connected to a deposit-taking institution,” Weill said in the interview. “Have banks be deposit-takers, have banks make commercial loans and real estate loans.”
Banks would be even more valuable if they heeded his advice, Weill said. Citigroup’s shares, which traded as high as $564.10 at the end of 2006 adjusted for a reverse stock split, plummeted to $10.20 during March of 2009, six months after Lehman Brothers Holdings Inc. filed for bankruptcy protection. They closed at $25.79 yesterday.
Jon Diat, a spokesman for the bank, declined to comment on the remarks by Weill, who held the positions of chairman and chief executive officer of Citigroup after the Travelers merger. He retains the title of chairman emeritus.
Richard Parsons, who earlier this year ended a 16-year tenure on Citigroup’s board, said in April that the repeal of Glass-Steagall made the business more complicated and ultimately helped cause the financial crisis. Former Citicorp CEO John Reed apologized in 2009 for his role in building Citigroup and said banks that big should be divided into separate parts.
The four most complex U.S. financial holding companies -- JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America -- each contain more than 2,000 subsidiaries, with two of those controlling more than 3,000 subsidiaries, according to a research paper published this month by the Federal Reserve Bank of New York. Citigroup has 1,645. Just one firm exceeded 500 subsidiaries in 1991, the report shows.
Weill said he hasn’t spoken with Citigroup CEO Vikram Pandit, 55, or JPMorgan’s Jamie Dimon, 56, about his change of heart. Dimon is a former protege of Weill’s and helped build Travelers before the merger with Citicorp.
Wall Street chiefs have resisted calls to break up their companies. Morgan Stanley CEO James Gorman, 54, described the debate as a “knee-jerk discussion” in a June 27 interview.
Dimon said he disagreed with a shareholder who asked on a July 13 conference call whether the bank had become too big to manage.
“I beg to differ,” Dimon said. “There is huge strength in this company that the units get from each other.”
Breaking up the banks into different parts would make the firms much more valuable, Weill said. The stocks of five of the six biggest U.S. banks -- Citigroup, JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley -- are languishing at or below tangible book value. That means different pieces of the banks are worth more than the whole, fund manager Michael F. Price said last month.
Citigroup’s shares trade at 50 percent of tangible book value and New York-based Morgan Stanley’s are at 47 percent, according to data compiled by Bloomberg.
“Now you have the preeminent creator of the large financial-conglomerate model agreeing that large banks should be broken up,” Michael Mayo, an analyst at CLSA Ltd. in New York who has covered the largest U.S. banks since before Glass-Steagall’s repeal, said in an interview. “It’s going to make some people pretty upset, since he’s the one who created the current Citigroup model, and now he’s saying, ‘Look, we messed up.’”
Even Alan Greenspan, who fought for the repeal of Glass-Steagall when he was chairman of the Federal Reserve, said in 2009 that breaking up the banks might make them more valuable.
“In 1911, we broke up Standard Oil -- so what happened?” Greenspan said at New York’s Council on Foreign Relations. “The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
Weill altered his view about the industry because “the world changes,” he said, adding that he’s “been thinking about it a lot over the last year.”
“The world we live in now is not the world we lived in 10 years ago,” Weill said. “Good things are simple.”
Former President Bill Clinton said when he signed the repeal of Glass-Steagall in 1999 that it was “no longer appropriate” for the economy.
“The world is very different,” Clinton said at a White House signing ceremony.