The Guile of Weill? Father of “Too Big to Fail” Calls Glass-Steagall Repeal a Mistake
Call it a change of heart, treachery to his class, or just plain seeing the light, Sandy Weill almost gave me a heart attack when he admitted that banks are out of control and, in fact, “too big to fail.” Not to worry, his hospital is near our NYC offices.
As the father of “too big to fail,” ex-Citigroup CEO Weill worked tirelessly back in the late 1990s to turn banks into financial juggernauts by throwing out regulations and limits on the lines of business a bank could engage in. Almost like a parent who says, “All I can do is give them the right upbringing,” his banking progeny have turned into financial Frankensteins. Not so much during his tenure, mind you, but as the natural progression of what he started has taken hold, the industry has grown in directions no one could have anticipated. More importantly, it has grown in directions that defy our ability to monitor or control the behavior.
No need to recap the transgressions of banking here, but the Weill statement, as reported by CNBC, is fascinating for two reasons. It is a remarkable proclamation about just how badly the experiment has failed. We now have the staunchest of all supporters surveying the damage and realizing the continued danger these institutions represent — placing him at odds with the likes of Weill’s onetime protégé and ardent Dodd-Frank critic, JPMorgan Chairman and CEO Jamie Dimon. Positively titillating.
Moreover, it leaves barely anyone — besides the banking industry, that is — to defend the continued commercial dominance and freedom these mega financial institutions enjoy. All that remains is the thick campaign-fund checkbooks that buy loyalty in Washington. However, at some point, as the crowd with pitchforks and torches grows, maybe even that will be too toxic for politicians.
What do you think about Weill’s statement — sincere reckoning or a rewriting of history?
I don’t think that the financial crisis had anything to do with “too big to fail”. If “too big” were the problem, then the small community banks would have skated through all of this jsut fine. The irony about “too big to fail” is that the big banks are in much better shape than many of the community banks.
Another irony is why big banks seem to be in better shape than small banks. While big banks were playing in the derivatives game that is “risky”, they stayed out of the local real estate development markets. These are the same markets that the small banks are into neck deep. The local real estate markets that hurt the derivatives markets and thus the big banks, absolutely killed the small banks. In addition, many of the small banks wanted to play the derivatives game with the big banks.
Ultimately, it is the more diverse business models of the big banks allowed by the change in law that has resulted in their recovering faster than small banks.
Having said all that, I am not a fan of any idea of “too big to fail” policy. If any big bank is on the verge of failing, let them. Have FDIC take them over and rip them up. However, the 2008 financial crisis was obviously not just a Lehman issue; it was an entire industry problem. The industry was clearly too important to be allowed to fail.
My concern is that Frank-Dodd hardly tackles the problem. You can’t call all investments derivatives and everyone who trades securities a bank. The “Volker” rule is not the right tool. In my opinion, transparent markets are the answer.
Obvious common sense.
But what it does highlight is the failure of those players who should be watching out for the public good – regulators/politicians, media, pension funds and other institutional investors. That a former CEO of one of the banks can say it before the vast majority of the professionals in these communities says a lot about their standards of professionalism.
John Fullerton and I highlighted this in a recent blog focusing on investors: http://www.responsible-investor.com/home/article/fin_cri_blog/
It has often been said that “happy slaves” are the easiest to control because they control themselves and the self-censorship in the investment community – even amongst firms that are members of UNPRI and ICGN – is quite shocking when it comes to a sector as dysfunctional and dangerous as the banks.
What it says about Mr. Weill: ignorance backed by chutzpah. I was selling to Citi when he was at the head of the organization and participated at a seminar where he was the keynote speaker. My reaction to his allocutions at the time: same as today!
I also have a problem wirth Mr. Edward Berry: The too-big-to-fails destroyed the market in which the smaller banks were functioning. Then got bailed out by the taxpayers, who did not bail out the small banks and are now mocking their own victims. That’s chutzpah which is even worse than Mr. Weill’s.
Mr Berry’s take that the big banks were healthy enough to weather the crisis is surprising: why would shareholders allow BofA and Citi to drop to near zero if such was the case?
The fiasco was indeed a big bank buster. Their holdings and cross-holdings of CDS, CDO etc, were toxic. JP Morgan’s dodging the bullet was a result of the comparative restraint. Having had a hand in the creation of these instruments, they were a bit wiser as to the possibility of illiquidity.
The blog entry cited above, by Messrs. Thamotheram and Fullerton, is a very helpful summary of the serious problems at play in the crisis. Most of these are still largely extant. Glass and Steagall may never have imagined a CDO, but they look prescient in their understanding of human nature and banking.
Before Congress, in October 2008, Alan Greenspan confessed to a “flaw” in his worldview pertaining to full deregulation of OTC derivatives. That’s a step but hardly worthy of his stature. He should join with Volcker, Richard Fischer of the Dallas Fed, Sheila Bair, and many others in in re-establishing a Glass-Steagall type arrangement. It’s time to restore competition and responsible banking; and free the taxpayer from the massive contingent liability presently in the system.