In their 1998 megamerger, Citicorp and Travelers Group execs clinked flutes over the advent of the financial supermarket: one-stop shopping for investment banking, certificates of deposit, proprietary trading, and the subprime falafel that wound up poisoning the entire economy. Sanford “Sandy” Weill, the architect of that deal, went on to have a hellish decade. In 2002, his name featured prominently in Eliot Spitzer’s conflicted equity-research investigations. Weill stepped down as Citigroup’s chief executive officer a year later and relinquished his chairman title in 2006. By 2008 and 2009, with his collapsed supermarket having received more government bailout money than any other bank, Weill became above all a cautionary tale of hubris that led to the meltdown. (Time magazine named him one of the 25 people to blame for the financial crisis.)
On Wednesday morning, the 79-year-old Weill, one of the 20th century’s most acquisitive bankers, stepped up to the mic to endorse … breaking up the banks. “What we should probably do is go split up investment banking from banking, have banks be deposit-takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” he remarked on CNBC.
Essentially, Weill was calling for the resurrection of the Glass-Steagall Act, which for 66 years separated pure deposit banking from other financial services until it was repealed in 1999, much to the Street’s glee. (The 1998 merger that built Citigroup required the Federal Reserve to temporarily waive the Act.)
“I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk,” Weill added. The best way to make money now as a bank, he elaborated, is as a pure-play company that needn’t worry about how its consumer and proprietary units potentially run afoul of new regulations. (Former Citi Chairman Richard Parsons experienced a similar revelation earlier this year. The deal’s co-architect, ex-CEO John Reed, has been remorseful for most of the 14 years since he shook hands with Weill.)
So it’s official, America: The “too big to fail” bank was both unfair and ultimately ineffective. Bailed-out 2012 Citigroup probably wouldn’t disagree, as it is in the throes of a painful deleveraging and suffering amid the widespread belief that it cannot be best of breed in any one line of business. Bank of America, which bought both Merrill Lynch and MBNA, is ruing the day it took on Countrywide’s mortgage morass. JPMorgan Chase, captained by onetime Weill protégé Jamie Dimon, is bigger than it’s ever been; accordion out its name and you’ll find Bank One, Bear Stearns, Providian, and Washington Mutual. But the place is now so unwieldy and too-big-to-manage that a trader known as the “London Whale” threatened to bring down the entire company.
Chopping these banking conglomerates into smaller, more focused, less systemically hazardous shops is a laudable goal. Thank you, Mr. Weill, for your courageous declaration. Why couldn’t you have made it a decade ago?