Weill Puts Glass-Steagall Back on Washington's Agenda

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WASHINGTON — Former Citigroup chief executive Sandy Weill's call for the reinstatement of a clear separation of commercial and investment banking reverberated loudly through the nation's capital Wednesday.

At a House hearing with Treasury Secretary Timothy Geithner, both Democratic and Republican lawmakers pounced on the comments, suggesting a new openness to the argument that the nation's largest banks should be broken up.

"It is absolutely huge that Sandy Weill has called for the break-up of the big banks," said Rep. Carolyn Maloney, D-N.Y., who represents much of Manhattan and voted for the 1999 repeal of the Depression-era Glass-Steagall Act.

Rep. Walter Jones, R-N.C., who had previously expressed regret over his earlier support repealing the law, said Wednesday that it was one of the worst votes he has made in 18 years in Congress. "Isn't it time to have a discussion and a debate about the reinstatement of Glass-Steagall?" he asked Geithner.

Geithner said that he had not yet heard Weill's comments, which were made on CNBC's morning news show "Squawk Box." And he argued that the Dodd-Frank Act provides strong disincentives — particularly in the form of tougher capital standards — against banks growing larger.

"All we can do is to try and protect the economy from the failures banks will inevitably make," Geithner said during a hearing that was otherwise dominated by the burgeoning scandal over banks' manipulation of the benchmark interest rate known as Libor.

"Our job is not to prevent them from making mistakes. We can try to do that. Our job is to make sure that when they make mistakes, they don't imperil the broader American economy and the safety of people's savings and make it harder for businesses to borrow."

But Geithner was less firm in his opposition to separating commercial banking from investment banking than he was during 2009 congressional testimony, when he said: "I would not support reinstating Glass-Steagall."

On Wednesday, the Treasury secretary argued that the Dodd-Frank reforms should be given a chance to work, but he also said: "Should we keep looking at what more we could do to make this system safer? Absolutely. And I expect Congress to continue to do that."

The stir began earlier in the morning, when Weill said, "What we should probably do is go and 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."

"I'm suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won't be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading, they're not subject to a Volcker rule, they can make some mistakes, but they'll have everything that clears with each other every single night so they can be mark-to-market," he said.

Weill's comments were particularly striking because the former Citigroup CEO was one of the main catalysts for the repeal of the law that separated commercial banking from investment banking. In 1998, Citicorp and Travelers Group merged to form Citigroup, and the company would have been forced to undertake massive divestitures had Glass-Steagall not been repealed.

The remarks touched off a torrid discussion Wednesday on the Internet, where by mid-afternoon, "Sandy Weill" was Twitter's second-highest-trending topic. At Salon.com, a writer likened Weill's change of heart to Ghengis Khan making a deathbed conversion to pacifism.

With his remarks, Weill joined former Citigroup Chairman John Reed, who in 2009 reversed his view on Glass-Steagall. (To see other prominent voices that are calling for big-bank breakups, click here.)

For longtime supporters of breaking up the big banks — including Democratic Sen. Sherrod Brown, who is proposing legislation that would impose strict limits on bank deposits, liabilities and leverage — Weill's comments were taken as vindication.

"Sanford Weill is one of many banking industry experts who have observed that too-big-to-fail is often too big to manage," Brown said in a statement.

"Allowing Wall Street megabanks to grow so large and over-leveraged that their downfall would send ripples throughout our entire economy isn't fair to taxpayers, and it isn't fair to mid-sized and community banks who don't enjoy the implicit guarantee from the Treasury Department that comes with too-big-to-fail status."

Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., who has also been a leading voice for breaking up the big banks, said Wednesday that Citigroup is a poster child for the too-big-to-fail problem.

"So it is truly ironic, but obviously I agree with him," Bair told CNBC, referring to Weill's statements. "I think these banks are too big to manage centrally. They're too big to regulate, and they don't produce good shareholder value, either. There's a lot of value to be had if they were broken up."

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Comments (5)
Maybe this is more of the cozy relationship between Wall Street and Washington, with Weill doing Geithner a post-career solid by shifting the spotlight away from what Geithner did or didn't do about Libor when he was at the NY Fed. (Kidding. I think.) - Harry Terris, data editor, American Banker
Posted by hterris1 | Wednesday, July 25 2012 at 4:49PM ET
The consolidation in the banking industry has not only resulted in a huge shift by allowing the top 5 banks to control most of America's deposits, but has been done at the expense of communites all over the country. The Glass-Stegall repeal pur consolidation on the fast track as traditional commercial banks saw their pricing on products impacted as the large banks could now tap depositor funds to fund non traditional products that the traditional commercial banks didn't have the expertise or scale to provide. And - as they amassed the majority of America's deposits they the fuel albeit FDIC deposits to take nontraditional risk. The large banks slowly commoditized the traditional commercial bank services as their model did not require the same level of profit spread in those services given they were now making their profit on the investment bank side. Two major things have happened, the moral hazzard was ramped up as all of these banks are public and the managers are playing with other's money ( and ultimately the Taxpayers) Second, as the banking industry consolidated, the number of communities that had a local or micro regional bank declined and those owner / bankers were gone. With them went the understanding and personal interest to see those markets grow. In addition, those local owners in many cases had a large protion of their personal net worth invested in those local banks, thus they had their capital at risk in making loans and investments.
While some consolidation was inevitable, the repeal of Glass-Stegal
accelerated it and in doing so has not only created a greater risk to our financial sytem but hurt our ability to invest in America.
Posted by Watchdog1 | Wednesday, July 25 2012 at 5:25PM ET
Weill is a fool, and his newfound "religion" is disingenuous, at best. "Humpty Dumpty" cannot be put back together again, despite the valiant efforts of Paul Volcker.

Also, Sheila Bair is correct: "Citigroup is a poster child for the too-big-to-fail problem."

See http://naegeleblog.wordpress.com/2010/09/27/the-economic-tsunami-continues-its-relentless-and-unforgiving-advance-globally/#comment-2224 ("Commercial Banking Distinguished From Investment Banking, Or Gambling") (see also the article itself, and the other comments beneath it)

Lastly, this is a fine article, but the horse has left the barn.
Posted by TimothyDNaegele | Wednesday, July 25 2012 at 5:47PM ET
Having precipitated the elimination of the Glass-Steagall Act established to prohibit banks from the imprudence and excesses that caused the worst economic disaster in US history, Weill set the stage for the second worst economic disaster in the US, as big banks resumed the same casino-like activities as in 1929. Were the consequences of his actions not so devastating for hundreds of millions of people and businesses around the world, we might be amused by the irony. Instead, Mr. Weill's comments makes me wonder why 'tar & feathering' ever went out of fashion.
Posted by jim_wells | Wednesday, July 25 2012 at 10:29PM ET
Correction: it wasn't "recently" that Lyndon LaRouche supporters began passing out pamphlets in support of a return to Glass-Steagall. It was in 2007, at the point where anyone should have been able to see that disaster was imminent, and that Glass-Steagall was an indispensable part of the solution. This is typical of why the LaRouche group gets such bad press-- they are always like the boy calling out that the emperor has no clothes.
Posted by Macwhirr | Saturday, July 28 2012 at 9:16PM ET
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