Sandy Weill stages an epic conversion
Marry in haste, repent at leisure – so goes the wise aphorism. There can be few better examples of this than the merger of Citibank with Travelers Group in 1998 and the demolition of the wall that separated investment from commercial banking.
Citi has long since been trading at well below its book value and the US taxpayer lives in fear of poorly regulated behemoths. Now all of a sudden Sandy Weill, chief architect of that mega-merger and a driving force behind the abolition of the Glass-Steagall act, is calling for a return to status quo ante. “We should have banks do something that’s not going to risk the taxpayer dollars – that’s not too big to fail,” Mr Weill told CNBC this week.
By the standards of conversion, Mr Weill’s change of mind must qualify as being up there with St Paul’s on the road to Damascus. That does not mean we should trust his judgment. If Mr Weill was wrong in 1999 – at fabled personal enrichment, it should be added – there is no reason to believe he is right about the matter now. And yet, Mr Weill finds himself in good and growing company. Among those who have repented at leisure are Mr Weill’s former colleagues Richard Parsons, Citi’s former
chairman, and John Reed, its former chief executive. Both were involved in the 1998 mega-merger.
All three watched Citi turn into a gigantic over-leveraged vehicle that had to be bailed out by taxpayers in 2008 (to the tune of $45bn). All three want to see a return to Glass-Steagall.
On balance they are right. In practice, the politics is against them. Having pushed furiously to consolidate disparate parts of the financial system, the Citi Three helped to create singularly effective lobbying entities.
Today’s challenge is to ensure that the much weaker Volcker rule has teeth. Alas, there is little cause for optimism. The rule, which originally sought to ban publicly-insured banks from trading on their own account, has been heavily contested by the large holding companies, such as Citi and Goldman Sachs. At 298 pages, the draft proposal was already shot through with caveats.
Paul Volcker has distanced himself from it. Earlier this year Carl Levin and Jeff Merkley, the two senators who fought hardest to strengthen the language, complained that the draft rule “seems focused on minimising its own impact”.
Since then, it has grown more complex. From reverse repurchase contracts to spot commodities, the exemptions have mounted. The final rule is expected next month. This week Sarah Bloom Raskin, a Federal Reserve governor, said she had been outvoted on the board.
“Proprietary trading [is] an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop,” she said. Most of her colleagues at the Fed apparently disagree on what that means in practice.
And therein lies the problem. Like the UK’s Vickers Commission, which wants to “ringfence” retail banks from their “casino” arms, the Volcker rule was always going to be fungible. As we have seen with the recent losses at JPMorgan Chase, banks can easily pass off a gamble as a hedge. Defenders of the post-Glass Steagall world say the 2008 meltdown would have happened anyway. They may be right. The subprime crisis did not originate with universal banks. And the asset bubbles were fuelled by vast global imbalances.
However, the US has emerged from the crisis with at least 13 banks that are too big to fail. Each, including Citi, benefits from a large implicit federal subsidy that funds investment banking activities. Any one of them could bring the system down. Mr Weill may be slow on the uptake but he has a point. If a bank is too big to fail, it is too big to exist.