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Wednesday, July 25, 2012

Foe of Glass-Steagall: Break Up the Big Banks

A few years after the financial crisis of 2008, Sanford Weill, the man behind the $70 billion merger of Travelers and Citigroup in 1998, urged the separation of investment banking from commercial 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 going to be too big to fail.” Even though banks had been able to exploit loopholes such that Glass-Steagall had essentially been eviscerated by the mid-1980s, Weill’s lobbying helped take down the law formally in 1999.

Weill might be illustrative of the saying, “be careful of what you wish for; you might just get it.” By enabling Citigroup to be a financial supermarket, he also made the bank “too unwieldy to manage, hunched over by the weight of disparate businesses with little in common and with byzantine corporate structures that made running the behemoth incredibly difficult,” according to the New York Times. In such a condition and yet too big to fail, the bank needed bailouts by the U.S. Government in September 2008. Referring to breaking up banks like Citigroup, Morgan Stanley and Goldman Sachs, Weill told CNBC on July 25, 2012, “I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Why this thinking had not gone into the Dodd-Frank Act of 2010 may point to the inordinate influence of the regulated on law-making affecting them.

In other words, the public interest in U.S. law may be dependent on business coming to the realization that additional regulation is in the firms’ own financial interest. This does not bode well for the public interest, being so conditioned. For the regulated do not normally have such an enlightened self-interest. In the case of Weill, he may have realized that especially with the incentives in Dodd-Frank, banks could be more profitable were they smaller. For example, the law requires additional capital reserves for the biggest banks. Nevertheless, greater profitability can result from losing the disproportionate costs of integrating disparate businesses in a huge financial supermarket or combination (this was Rockefeller’s name for Standard Oil Co, as it replaced competition with coordination via a monopolistic organization). Dodd-Frank comes up short even in terms of why being big may not pay.

So why, one might ask, did Weill want a financial empire in the first place? Even if empire-building does not pay off financially in proportional terms, running a bigger company can pay off in terms of experiencing the pleasure of power over others. Moreover, one can feel that one’s hackneyed managerial tasks (even as a  CEO) are somehow significant, if only in terms of getting into the headlines. In explaining big business, more than a financial calculator is necessary. In the end, the bankers’ resistance to Dodd-Frank breaking up the biggies may have come down not just to ignorance, but also to the lust for power (rather than merely for money). Whatever the dominant motive, it is pretty clear that Congress has been following in its wake rather than molding or channeling it from out in front.


Michael J. De La Merced, “Weill Calls for Splitting Up Big Banks,” The New York Times, July 25, 2012. http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/