Since the financial crisis of 2008, there have been a host of critics of the banking industry who have called for hard caps on the size of banking institutions, as well as the separation of commercial banking activity like deposit taking and mortgage lending, on one hand, and on the other investment banking, which includes risky behavior like underwriting stock issuance and speculating in financial instruments. This separation was once enforced by a law called Glass-Steagall, which was passed in the wake of the 1929 stock market crash, but which was slowly amended throughout the years, and finally repealled altogether in the late 1990′s.
Predictably, most of these calls have come from regulators or academics, and not bankers themselves. But yesterday on CNBC, Sandy Weill, former chairman and CEO of Citigroup – the bank which more than any other pioneered the era in which financial institutions became one-stop-shops for all financial services – called for once again reinstating separations between investment and commercial banking. Said Weill:
“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 to fail.”
That a pioneer of banking “supermarkets” would himself call for such a separation was such a surprise that CNBC host Andrew Ross Sorkin declared himself “speechless.” But Weill isn’t the only former banker who has regretted the era in which banks rapidly consolidated themselves. According to a report in Dealbook,
“In 2009, John S. Reed, who with Mr. Weill forged the megamerger that created Citigroup, apologized for creating a lumbering giant that needed multibillion-dollar bailouts from the government. Philip Purcell, the former chief executive of Morgan Stanley and David H. Komansky, the onetime leader of Merrill Lynch, two other main figures in the fight to repeal Glass-Steagall, have echoed similar concerns about deregulation.”
Of course many of the current heads of the nation’s largest banks are against any forcible breaking up or downsizing of their banks. In Congressional testimony earlier this year, JPMorgan CEO Jamie Dimon defended his banks’ size – arguing that it helped it stay solvent during the worst times of the financial crisis. Another popular argument for large bank’s size and scope is that their clients – large multinational firms – are comparably large and complex, and therefore need banks with deep pockets.
Either way, Weill’s proclamation will give added ammunition for those who wish to impose greater restrictions on Wall St. In fact, the interview has already garnered reaction from Congress. According to a report in American Banker, both Republican Representative Walter Jones and Democratic Rep. Carolyn Maloney reacted favorably to Weill’s comments, with Jones asking Treasury Secretary Tim Geithner in a hearing yesterday, “Isn’t it time we had a debate about the reinstatement of Glass-Steagall?’’