General Discussion

ProSense

(116,464 posts) Mon Jul 30, 2012, 10:06 AM Jul 2012

A Big Banker’s Belated Apology

A Big Banker’s Belated Apology

By JEFF MADRICK

Last week, in a CNBC interview, Sanford I. Weill, the former chairman of Citigroup, said that America should separate investment banking from commercial banking. This separation, of course, was the prime purpose of the Glass-Steagall Act of 1933, a piece of legislation that Mr. Weill and other bankers had successfully watered down, with Alan Greenspan’s support, before Mr. Weill helped engineer its official demise in 1999. Now, Mr. Weill, the creator of what was once the largest financial conglomerate in the world, suggests that Citigroup and others should be broken up. Banks can no longer “be too big to fail,” he told CNBC.

But what was most eye-catching was Mr. Weill’s claim that the conglomerate model “was right for that time.” Nothing could be further from the truth.

Mr. Weill’s original business concept — the justification of financial conglomeration — was to provide one-stop shopping to any and all customers. This could now include clients for investment banking, stock research, brokerage and insurance. Then, with the 1998 merger of his Travelers Group with Citicorp, it could include savers, business borrowers and credit card users, too. But few, even among his own executives, ever believed the strategy would work.

Rather, conglomeration bred conflicts of interest in Mr. Weill’s firms, and others — the very conflicts that the original Glass-Steagall Act was designed to prevent. This inevitably led to investment in and promotion of risky, poorly run and, in some cases, deceitful companies that brought us the high-technology and telecommunications bubble of the late 1990s.

- more -

http://www.nytimes.com/2012/07/30/opinion/a-big-bankers-belated-apology.html

The repeal of Glass-Steagall was signed in 1999. Glass-Steagall wasn't about the systemic risk posed by the size of commericial banks. Krugman:

<...>

They certainly were worried about systemic risk in 1982, when I had something of a front-row seat. There were fears that the Latin debt crisis would take down one or more money center banks — Citi, or Chase, say. And policy was shaped in part by the desire to make sure that didn’t happen. Bear in mind that this was in the days before the repeal of Glass-Steagal, before finance got so big and wild; the New Deal regulations were mostly still in place. Yet even then major banks were too big to fail.

http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/

Glass-Steagall was about separating commercial banking from investment banking:

•Banking Act of 1933 (P.L. 73-66, 48 STAT. 162).
Also known as the Glass-Steagall Act. Established the FDIC as a temporary agency. Separated commercial banking from investment banking, establishing them as separate lines of commerce.

http://www.fdic.gov/regulations/laws/important/index.html

The fact is that prior to Dodd-Frank, the FDIC did not have the powers to break up big banks, which were growing larger even in the 1980s, as Krugman points out. The FDIC was given those powers under Dodd-Frank.

January 25, 2012 — Bank of America, the second-largest bank holding company in the U.S., should be broken up and reformed, Public Citizen said in a petition sent today to the Federal Reserve and the Financial Stability Oversight Council. Regulators should to use authority granted by section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to reform Bank of America into a set of smaller, simpler and safer institutions. Bank of America, which holds assets equal to roughly one-seventh of the country’s gross domestic product, is too large and complex to manage or regulate properly, the petition said. Moreover, its financial condition is poor and could deteriorate rapidly.

http://www.citizen.org/bank-of-america-grave-threat-petition

<...>

The Wall Street reform bill would limit large, complex financial companies and prevent bailouts:

·Costs to Financial Firms, Not Taxpayers: The largest financial firms would bear the costs of shutting down a large failing financial firm. The bill would ensure that industry, not the taxpayers, would pay for liquidating large, interconnected financial companies.

·Funeral Plans: Large, complex financial companies would be required to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies would be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they failed to submit acceptable plans.

·Orderly Liquidation: The FDIC would have the authority to unwind failing systemically significant financial companies. Shareholders and unsecured creditors would bear losses and management would be removed.

·Liquidation Procedure: TheTreasury Department, FDIC and the Federal Reserve would all have to agree to put a company into the orderly liquidation process. A panel of three bankruptcy judges would be required to convene and agree within 24 hours that a company is insolvent.

·Federal Reserve Emergency Lending: The Federal Reserve’s 13(3) emergency lending authority would be updated to prohibit emergency lending to an individual entity.

·Limits on Debt Guarantees: To prevent bank runs, the FDIC could guarantee the debt of solvent insured banks, but only after meeting serious requirements: 2/3 majority of the Board and the FDIC board determined that there is a threat to financial stability; and the Treasury Secretary approved the terms and conditions and set a cap on overall guarantee amounts.

·Bankruptcy: Most large financial companies are expected to be resolved through the bankruptcy process.

http://dpc.senate.gov/docs/fs-111-2-69.html