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Former Citigroup Chief Executive Sandy Weill on Wednesday called for breaking up the biggest financial institutions, speaking on CNBC's "Squawk Box."
"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, have banks do something that's not going to risk the taxpayer dollars, that's not 'too big to fail,'" Weill said.
Weill isn't just the former CEO of Citigroup [C 27.30 1.02 (+3.88%) ]. He was its creator.
Starting with a small lender in Baltimore, Weill built the world's first one-stop-shop megabank that could offer customers every financial service available. Retail banking, commercial banking, insurance, investment banking, financial brokerage and trading all under one roof. He merged Citibank with the Travelers insurance company, a move which required the repeal of the Glass-Steagall Act.
But it is far from clear that the kind of changes Weill proposes, splitting investment banking from retail and commercial banking, would have prevented the near-collapse of Citi or avoided the financial crisis. Citi's problems arose from its extreme exposure to mortgage loans — something that could have happened even if it never engaged in investment banking. It was considered too big to fail not because of its investment banking operations but because of it sheer size.
You have to wonder whether Weill, who once had a fireplace installed in his office on the 106th floor of the World Trade Center, is in legacy-preservation mode. He knows he built the monster but now wants to be thought of as one of the good guys? So he's saying the monster needs to be taken apart. Perhaps he's hoping that he'll be remembered as a reformer instead of the evil scientist.
Hate to break it to you, Sandy, bro. You're always going to be the guy who built the monster.
Like gangsters, the nation's 'banksters' shouldn't be left to their own devices.
A man walks past the headquarters of JPMorgan Chase on Park Avenue in New York City. ( John Moore / Getty Images / July 13, 2012)
By Barry Goldman
July 29, 2012
I heard a case some time ago involving a guard at a maximum-security prison. He had been discharged for failing to follow inmate security procedures, and he was appealing his firing. In an effort to get me to understand the environment I was dealing with and the importance of those procedures, prison officials testified about an earlier incident.
They described how two guards had been escorting a prisoner back to his cell after a shower. The prisoner's hands were handcuffed behind his back. Procedure called for the guards to put the prisoner in the cell with his hands still handcuffed and close the door. The prisoner was to turn around and present his handcuffs at the slot in the door so the guards could unlock them from the outside. In this case though, each guard thought the other one had the keys to the cuffs.
It took about 45 seconds for one of the guards to run down the hall, get the keys and run back. That wouldn't have been a problem if the prisoner had been alone in the cell, but there was another inmate in there. When the man already in the cell realized his cellmate was defenseless, he saw an opportunity. While prisoners in the cells along the hallway shouted encouragement, he beat the handcuffed prisoner's head against the wall until the guards came in and stopped him. The handcuffed prisoner was pulled from the cell bloody and unconscious.
I was reminded of that story when I read about the latest wrinkle in the so-called London Whale saga at JPMorgan Chase & Co. According to an article in the New York Times, the New York Fed reassigned nearly all of the 40-odd regulators responsible for JPMorgan in mid-2011 and replaced them with new ones. The idea was to bring in new people with needed expertise, and to get the old ones out to prevent cozy relationships between bankers and their overseers. Good plan. But in the few months it took the new examiners to find their way around, undersupervised JPMorgan traders blew through $5.8 billion making bad bets on derivatives.
If you worked 40 hours a week, 50 weeks a year, and you lost a million dollars an hour every hour, it would take you almost three years to lose $5.8 billion. The JPMorgan guys were able to do it in a few months. But they are dedicated and highly trained professionals. No doubt they stay late and work through lunch.
There was evidence in the prison case that the guards should have seen the assault coming. The two cellmates were from different gangs, with a sworn duty to kill each other whenever they could. But the same could be said of the JPMorgan case. By now we should know enough about derivatives traders to know that left to their own devices, they will blow up anything they touch.
The problem in both cases comes from the fact that the perpetrators have nothing to lose. The violent prisoner goes up in status among his gangster friends if he bloodies a member of a rival gang, and there is no effective way to punish him. What are they going to do, put him in prison? The reckless derivatives trader goes up in status if he makes money, and if he loses, the worst that will happen is that his employer will "claw back" a few of his millions. If things get really out of hand, the taxpayers will bail out his "too big to fail" bank.
The answer in both cases is better regulation and supervision. Our society is one that produces both gangsters and "banksters." They tend to come from different neighborhoods, but we don't seem to be able to avoid producing either one. They are failures of our civilization. But having produced them, and knowing how much mayhem they can cause, it is inexcusably stupid to leave them unsupervised.
Barry Goldman is an arbitrator and mediator and the author of "The Science of Settlement: Ideas for Negotiators."
Copyright © 2012, Los Angeles Times