Weill Says Break Up Citigroup: Now He Tells Us

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By James Greiff

Maybe Sanford Weill is having builder's remorse.

Weill, 79, is best known as the man who put together the thrice-bailed-out bank known as Citigroup Inc. Today, speaking on CNBC, the former chief executive officer and chairman said that big banks like the one he created should be split up to shield taxpayers from the consequences of their losses.

If anyone is struck with a sense of "Now he tells us," it might be understandable. No one was a more forceful advocate than Weill of rolling back the Depression-era Glass-Steagall law that had separated commercial banks from their risky investment banking operations. Weill, along with John Reed, oversaw the 1998 combination of Travelers Group Inc. and Citicorp with the goal of cross-selling a full range of financial products, from merger advice to retirement annuities. Bank of America Corp. and JPMorgan Chase & Co. followed with mega-deals of their own.

What Weill never foresaw was that building huge banks would strain the unwritten policy known as too big to fail, a term first invoked in 1984 when the government was forced to prop up Continental Illinois, then the nation's seventh-biggest bank. Regulators covered all deposits -- not just insured accounts -- and spared bondholders from suffering losses.

Today, the implications are well understood: The government deems it unthinkable to let any major bank or other financial institution fail lest it drag down other banks and destroy the economy. Bankers are free to engage in behavior that puts their firms at risk, collecting outsize pay if their bets pay off. If they don't, taxpayers absorb the losses.

That Weill now understands the implications of his vision says a great deal. He's actually late to the game. Several of Weill's contemporaries have already recognized how untenable the nation's megabanks have become. Reed three years ago said that he had erred in helping Weill construct Citigroup and said it should be broken up. Richard Parsons, who served on Citigroup's board for 16 years, said repealing Glass-Steagall helped cause the financial crisis of 2008. Even Weill's old employer, where he holds the title chairman emeritus, has taken a tentative step in the direction of undoing some of his handiwork, selling the Travelers insurance business to MetLife in 2005.

One person who so far doesn't seem to be a convert is Weill's former protege, Jamie Dimon, now the chief executive officer of JPMorgan. Earlier this month the bank reported second-quarter earnings and said that it had a whopping $5.8 billion (and counting) trading loss. Many critics of too-big-to-fail banks cited the loss as evidence that banks such as JPMorgan are too sprawling and too risky and should be broken into smaller components. On an earnings conference call with analysts Dimon was asked if the bank had grown too large to manage. His response: "No."

It's worth wondering if Dimon, seeing his former mentor in the break-them-up camp, will someday have a different answer.

(James Greiff is a member of the Bloomberg View editorial board. Follow him on Twitter.)

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-0- Jul/25/2012 15:46 GMT