Jul 30, 2012

Weill calls to break up the big ‘supermarket’ banks

One can’t help but marvel at the hide of Sanford I. Weill, better known as Sandy Weill -- creator of Citigroup.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

One can’t help but marvel at the hide of Sanford I. Weill, better known as Sandy Weill -- creator of Citigroup and destroyer of the Glass-Steagall Act. Last week, Weill admitted that "supermarket" banks, of which his own Citigroup was the first, should be broken up. Weill, a former member of the Forbes 400, told CNBC that "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 and have banks do something that’s not going to risk the taxpayer dollars, that’s not too big too fail." Weill, for possibly the first time, was completely correct. It’s just a shame that his monstrous creation of Citigroup in 1999 led to those very taxpayer dollars being spent on a bailout -- all $US45 billion of then.Weill was named by Time magazine as one of the "25 People to Blame for the Financial Crisis". While Citi’s collapse did little for Weill’s reputation on Wall Street, he had fortunately long ago received $US300 million from Citigroup in 2003 to buy back some of his shares, and by 2006 had managed to amass $US1.5 billion, according to Forbes. Weill has since dropped off the Forbes 400 list of richest Americans but certainly won't be lining up for food stamps. He owns several mega estates, including this one in Greenwich, Connecticut and a $US31 million California vineyard. Last year Weill sold his upper west-side New York apartment to Russian billionaire Dmitry Rybolovlev for $US88 million. Weill’s performance at Citi (which was created by the merger of Weill’s Traveller’s group and Citibank) is best shown in the group's share price. Under his successor, Chuck Prince, Citi's share price fell from $US55 to be currently $US2.70 (it split 10:1 in May 2011). In addition to the $US45 billion bailout, the US taxpayer was also forced to step in an provide a guarantee for $US300 billion. (While some claim that the US government made a "profit" on the bailout, in reality, that was not the case as that profit was created through lending money to the bank at zero percent and paying it a 3.7% rate in return.) Before Weill and his lobbyists convinced US lawmakers to pass the Gramm-Leach-Bliley Act, US investment banks, commercial banks and insurers were not able to housed in one institution -- the act was the legislative confirmation of too big to fail. (Another indirect beneficiary of the Gramm-Leach-Bliley Act was Enron, which happened to count Phil Gramm’s wife, Wendy, as one of its directors.) Weill’s comments are all the more surprising as he certainly didn't recoil from his role in removing Glass-Steagall -- his office allegedly contained a plaque that dubbed Weill "the Shatterer of Glass-Steagall". Weill’s comments come not long after his former deputy turned rival, Jamie Dimon, was severely embarrassed by a multibillion dollar "hedging" loss at the now largest financial supermarket, JPMoganChase. JPMorgan’s claims that the loss was due to hedging rather the proprietary trading was, of course, pure bunkum, as the entire purpose of a hedge is to limit exposure to risk, not create billions of dollars of profits (or as JPMorgan would find out, losses). Weill’s comments also followed those of former Morgan Stanley chief Phil Purcell, who also claimed that breaking up the largest banks would make them better investments, and come as Congress continues to debate the Volcker Rule, which intended to prevent banks from any form of proprietary trading. Fortunately for the large banks and their teams of highly paid lobbyists, Congress will not pass any legislation to that seriously curtails proprietary trading (sizeable campaign donations will see to that). Any legislation that is eventually enacted will no doubt be riddled with exceptions that will allow bankers to continue risking shareholder and taxpayer dollars to generate lofty bonuses -- just like Sandy's.

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3 thoughts on “Weill calls to break up the big ‘supermarket’ banks

  1. zut alors

    Once glass is shattered it’s nigh impossible to restore.

  2. Jeff White

    Spoken like a true investment banker, Sandy. A fee on the way in for the merger, a fee on the way out for the separation. The bankers equivalent of perpetual motion. Gotta love it.

  3. Dogs breakfast

    That leaves the question of why this wasn’t pursued in Australia.

    We had the opportunity, we had the political chance, we had Joe Hockey talking glibly about banking reform, without ever enunciating a proposal of any sorts.

    Why didn’t Swan take him on? Why didn’t we move to separate the retail from the investment banks?

    Because the banks were profitable, was the refrain from the banking industry, which is a great argument, until they aren’t.

    And when won’t they be? Well nobody knows, but that’s why you do it. Each bank has some history of nearly going to the wall in the last 30 years due to incompetent and over-reaching decisions. As it is, the banks here are just as tightly bound to the real estate market as the US banks were before the great crash, but we are still paying off our mortgages.

    But then what happens if unemployment goes to 10%, or 15%. Suddenly the real estate market is bust and the banks aren’t far behind.

    Perhaps separation won’t save them in that case, but as the govt has and will continue to guarantee the banks, there is still a good case to argue the separation. At least the govt (taxpayer) will only be bailing out the retail bank business.


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