Ex-Citigroup CEO Weill: Time to Break Up the 'Too Big to Fail' Banks

Sandy Weill
By Jed Horowitz and David Henry

Sanford "Sandy" Weill, the tycoon who built financial conglomerate Citigroup (C) into a massive U.S. commercial and investment bank, said it is time to split up the biggest banks so they can go back to growing again.

The comments were an astonishing about-face for Weill, who in the late 1990's smashed the U.S. law known as "Glass-Steagall" that divided commercial and investment banking. Riskier investment banking activities should be separated from safer commercial banking, and the government should only have to insure the latter, Weill said.

"The world changes, and the world that we live in is different from the one that we lived in 10 years ago," Weill said in an interview with television network CNBC.

Other long-time Wall Street players were quick to applaud Weill. Said Arthur Levitt, Weill's former business partner in the 1960s and a chairman of the Securities Exchange Commission in the 1990s: "It's a very difficult statement for him to make since he was largely responsible for the repeal of Glass-Steagall, and he's absolutely right. This is a very significant statement."

But even if a growing number of former bank executives are calling for big banks to be broken up, there is little evidence that current bank executives or regulators are listening. Big banks are dieting instead of amputating: they are selling smaller units and laying off staff without completely dismantling themselves.

The closest any banks have come so far is in shrinking their balance sheets. Morgan Stanley, for example, said last week that by the end of 2014 it plans to reduce fixed-income trading assets by about 30 percent from third-quarter 2011 levels. Citigroup has reduced its Citi Holdings unit, which holds assets the bank hopes to shed, to $191 billion from about $650 billion in 2009.

Regulators are putting some limits on big banks, lawyers said. They are blocking them from making big acquisitions, and demanding that "too big to fail" banks fund themselves with more equity capital.

Treasury Secretary Tim Geithner said on Wednesday that these steps and others the United States has already taken are serious.

"Congress put in place limits on how large they can get and deprived government of the ability to come in and rescue them from their mistakes," he told lawmakers at the House Financial Services Committee hearing.

A 'Creative' Invsetment Banking Sector

But Weill called for far deeper changes among the major banks, noting that when investment banks are no longer eligible to be bailed out by the Federal Reserve, they can go back to innovating and growing fast.

"Let's have a creative investment banking system like we have always had, so that the financial industry can once again attract the best and the brightest like they are doing in Silicon Valley," Weill said, referring to the region near San Francisco often seen as the epicenter of the technology sector.

The Glass-Steagall law, known as "The Banking Act of 1933," was passed during the Great Depression to help restore faith in banks. It revamped the financial system, creating, for example, deposit insurance, in addition to separating commercial and investment banking.

Looser regulations in the 1980s and 1990s chipped away at Glass-Steagall. But when Weill's Travelers Group, which included an insurer and the Salomon Brothers investment bank, took over Citicorp in 1998, it needed a special temporary regulatory exemption to operate those businesses together.

Weill lobbied heavily for key provisions of Glass-Steagall to be repealed, a change he won in 1999. Since then, the U.S. banking system has become considerably more concentrated.

A Growing Chorus

Other major former bank executives have also called for banks to be split up. Phil Purcell, the former chairman and chief executive officer of Morgan Stanley (MS), wrote in an opinion piece in The Wall Street Journal last month that shareholders would benefit from such moves.

Breaking up the biggest banks could double or triple the value of the companies, Purcell wrote. Purcell long advocated for "financial supermarkets" starting with his work at McKinsey in the 1970s.

John Reed, the former chief executive of Citicorp who worked with Weill on the 1997 merger with Travelers, said in March that he regrets his role and is astounded at the way banks continue to fight regulations to rein in risky activities.

"It wasn't that there was one or two or institutions that, you know, got carried away and did stupid things. It was, we all did ... and then the whole system came down," Reed said on Bill Moyers' public television show.

Former regulators have also argued for break-ups. Sheila Bair, chairman of the Federal Deposit Insurance Corp until last year, wrote in a January column in Fortune that shareholders should press for banks to break themselves up, and that banks' customers would benefit.

Soon after JPMorgan Chase's (JPM) Chief Executive Jamie Dimon said the bank could lose billions from bad credit derivatives trades in May, Bair wrote another column calling for big banks to be broken up because they are too big to manage effectively.

There is some limited support for breaking up banks in Washington. Sen. Sherrod Brown (D-Ohio) has introduced a law that would limit how big banks can get, for example through limiting how much they can borrow and how big they can be relative to the overall economy.

The senator said in a statement on Wednesday, "Allowing Wall Street megabanks to grow so large and over-leveraged ... isn't fair to taxpayers."

But Brown's bill is seen as a longshot, and Bair noted in her May column that "in Washington, no one is seriously discussing breaking up the big banks."

Many on Wall Street were flabbergasted by Weill's comments. "I think it was a guy with a mask on who looked like Sandy Weill," said Alan "Ace" Greenberg, the former chairman and chief executive of Bears Stearns, who's now an adviser with JPMorgan Chase & Co.

"I've known Sandy for a long time and it didn't sound like him to me," Greenberg added.


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17 Comments

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jhon.chena

Great Article,
There is a one-two punch that will turn the economy around and protect Americans from one percentage interest while the CEO's are pocketing billions while risking life long savings!

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April 12 2013 at 6:05 AM Report abuse rate up rate down Reply
sheriffchris

Sandy Weill screwed, dirtied and tarnished everything he ever touched. He was the worst of the greedy Bankers !
A total scam artist who screwed everyone he deealt with..............

February 22 2013 at 3:44 PM Report abuse rate up rate down Reply
jmbkanga2

From my point of view, it's more important for banks to be REGULATED than to be "broken up". Because they are no longer regulated after congress repealed Glass-Steagall and passed The Financial Services Modernization Act of 1999 (aka Gramm-Leach-Bliley) banks have bullied and abused their customers, and practiced deceitful methods to manipulate their customers. Also, because banks are no longer regulated, very few loan modifications have actually taken place, even though promises were made to congress in return for the huge bailouts made to keep the banks afloat after so many nearly went under due to their own fiscal mismanagement and imprudent lending practices. Resurrecting and reinstating Glass-Steagall is a good start, but Gramm-Leach-Bliley must be repealed if we are ever to return to the stable financial system we enjoyed for 66 years under Glass-Steagall. I'd be interested to know how Sandy Weill made out during the financial collapse he started and if he lost money on his own investments or if his own home(s) declined in value, or if he's suffered any financial loss at all, other than a well-deserved tarnished reputation.

July 29 2012 at 12:49 AM Report abuse +1 rate up rate down Reply
drakeg5555

Why would anyone ask the guy who fired Dimon and put a lawyer without any operating experience in charge (ultimately causing thousands of shareholders and employees to lose so much ) a question about operating a company. He may be a creative strategist and politician, but I wouldn't let him run a candy store. In an interview last year John Red said mr. Weill's primary focus was on becoming " very rich ". II suspect he is trying to unseat Dimon and get richer in the process.
Ask these questions of people with credibility so we can evaluate the issue based on facts.

July 27 2012 at 6:53 PM Report abuse rate up rate down Reply
dazzle7777777

What gall this guy has. Just like Nixon, he now feels that enough time has lapsed since his destruction of Citicorp that he can re-emerge as a Business Statesman and feed his enormous ego again.

This clown has destroyed countless fortunes and careers. He purged all the Citibankers and put his cronies in charge of a world-class banking enterprise. In 10 years they drove it into the ground and escaped with most of their fortunes.

Then, after the Board fired him he flew to the Prince's tent in Saudi to beg for his job back. Love to have been a scorpion on that tent's wall.

He still dosen't get it.

He put Traders in charge of Citi. Traders trade. They use external rating agencies to make decisions. And then they trade some more. And then they lost BIG!

He's a LOSER..

July 27 2012 at 6:46 PM Report abuse rate up rate down Reply
Bert

Why Don’t We Focus on Innovation, Partnership and Collaboration?

Finally, Sandy Weil acknowledged the mistake of bigness. This is 17 years after the ill-fated strategy of integrating financial services and merging Citibank and Travelers Insurance. While he was joined by several other former banking executives, most current banking executives continue to argue that bigness and integration is a virtue. .What is really missing is a realistic view of many issues and the changing environment we live in. In summary the changes taking place in the world economy make the competitive advantages of size obsolete. This issue is more prevalent in the banking business but applies to many oversized and obsolete companies .. They have spent years making acquisitions and, investments to provide more synergy, economies of scale and presumably profits.. This is instead of challenging the entire strategy and structure of their organizations and spin off many of their entities to maximize shareholder value!

The overall issue is best evidenced by comparing the performance of different types of companies. Between the years 2002 and 2012 ,the results of buying 50 shares each of the following large prestige leading Companies : Coca-Cola , Citygroup , Dell , Exxon-Mobil , G.M. , G.E. , I.BM. , Disney, 3M, Johnson & Johnson, Microsoft, Wal-Mart, Pfizer and Proctor & Gamble are as follows: You would have invested about $66,000 and lost about $ 26,000 or about 40 %

In contrast if you bought 100 shares of Cognizant, Ralph Lauren, Google, Hanes, Coach, VMware, Costco, Apple, and Amazon in 2002 or whenever they went public the results are as follows: You would have invested about $ 26,000 and it would be worth almost $ 188,000 or over a 20 % annual return.

This reality of the poor performance of many organizations is virtually ignored in every discussion of opportunities in both the public and private sectors. What is even more distressing is that it is the structure of these organizations that produces much of the results rather than the typical financial analysis .The presumed advantages of bigness such as economies of scale, spreading expertise; marketing synergies etc. have simply shown little evidence of success in the last few years. Why is this phenomenon so apparent and why have some organizations shown progress and success?


The positive aspect of this argument is that clear solutions are available The unfortunate death of Steve Jobs has reminded us of the energy and results that can occur when individuals have the motivation and confidence to perform at high levels. The challenge for organizations and individuals is to create an environment where that can occur.

July 27 2012 at 2:13 PM Report abuse rate up rate down Reply
Artie

Once in a long while "common sense" shows some a small glimmer of life in this country. They need to bring back Glass Steagall and break up the "too big to fail" banks. End of story. Good luck with this though. The current cropo of "banksters" and Wall Street wise guys still have the politicians in their pockets and own the regulators including Tim Geitner and his ilk.. An advocate for the taxpayers is going to have to come along and this "too big to fail" bank break-up is going to have to be a ballot item. Perhaps, then this country will do the right thing for the majority of its citizens.. Right now the banks make the rules and manage to circumvent and shoot holes in any REAL regulations designed to reign these crooks and questionable transactions in. Whatever financial restrictions and regulation that have been imposed since the financial meltdown is a laughable smokescreen and total BS. It is simply window dressing. It is back to business as usual on Wall Street until the next meltdown. Nothing has really changed. And, things indeed have to change. The sooner the better for the rest of us. No more bail-outs and bonuses for wrecking companies and the economy.. Time to put some of these crooks in jail for good measure, too. Not one of them has been incarcerated for the housing fiasco and havoc they wreaked on the global economy. Greed knows no limits.

July 27 2012 at 9:55 AM Report abuse rate up rate down Reply
sav147

he;s right but not the way he wants ,go back to Glass-Steagall, it work just fine for almost 70 years before smart people like Sandy ,and others convince Clinton and Congress that if Goverment would just get out of they way everything would be great ................yea right! we know what works go back. Because you can bet our taxpayer dollars that another crash is coming that these Bankster will cry we have to save them again.

July 26 2012 at 11:14 PM Report abuse +2 rate up rate down Reply
Orlando

And if there is too much negativity and blockage among Congressmen to split up the banks...issue a new charter to bankers who want and support new safe commercial savings banks! There is a one-two punch that will turn the economy around and protect Americans from one percentage interest while the CEO's are pocketing billions while risking life long savings! Hubba-hubba! rcw/ocm

July 26 2012 at 3:02 PM Report abuse rate up rate down Reply
rema88

RIGHT ON!!!!!!

July 26 2012 at 2:34 PM Report abuse rate up rate down Reply