Weill Adds Voice to End “Too Big to Fail”

By Maxwell Fisher - August 3, 2012 | Tickers: BAC, C, JPM, NES.DL, WFC | 0 Comments

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Sandy Weill has joined the growing chorus of industry insiders who have come to realize that banking deregulation did not and cannot work, and that it would be better, safer, and more predictable to return to the days of Glass Steagall, during which there was a firewall between deposit gathering banks and investment banks. The irony of this is, no one worked harder to repeal Glass Steagall than Sandy Weill. The chorus itself includes at least two regional Federal Reserve presidents, Richard Fisher, President of the Dallas Federal Reserve and St. Louis Federal Reserve President James Bullard, in addition to David Lynch of Bloomberg News. Simon Johnson of MIT, Newt Gingrich and many others. But Weill is different. He is the ultimate insider and deal maker, and at this point of his life, appears not to have a “dog in this fight,” other than his reputation

For a little perspective, Weill was named by Time Magazine as one of the 25 individuals it considered most responsible for last decade's banking crisis. His career began in small brokerages, but eventually he managed to acquire Bear Stearns brokerage and Travelers Insurance. He allowed the merger of them with what is now Citigroup (NYSE: C) in 1998, but at that time Glass Steagall forbade banks from owning insurance companies or investment brokerages. No problem, as Weill and other Wall Street friends, many of which are in place in the Obama administration, began a fierce lobbying campaign to finally repeal Glass Steagall, which proved successful just one year later. Legend is that on his office wall at Citigroup, there is a plaque on which is inscribed, “Shatterer of Glass Steagall.” It was Weill who, more than anyone else, pushed the idea of a financial “supermarket” and made Citigroup the largest bank in the country through most of last decade.

It is my belief that the repeal of Glass Steagall led both directly and indirectly to last decade's banking crisis. I am concerned about the fact that the nation's five largest banks control over 60% of banking assets. I was disappointed that the Financial Stability Board was compelled to include eight American banks among its 29 Banks Too Big to Fail. I am disappointed that three years after Dodd Frank's preamble of the goal of eliminating the notion of “too big to fail,” absolutely nothing has been done to move toward that goal.

Let's take a leap of faith, as momentum seems to slowly be building, pushed along by scandals such as JPMorgan Chase's (NYSE: JPM) huge trading losses and the more recent LIBOR manipulation, that large domestic banks may voluntarily or by law be forced to break up. One report recently came out that Morgan Stanley (NYSE: MS) should break up for the benefit of its shareholders. Its current price is 42% of its book value, and the earnings coming from the big investment banking firm show no signs of increasing anytime soon. Since Morgan Stanley has no deposit taking presence, a break up seems hard to fathom, but a sale to maximize shareholder value might be in shareholders' best interests, rather than waiting for capital markets in Europe to improve. 

The argument goes in general that the big, integrated banks have gotten so big, and so broad, as to be unmanageable. That is the failure of Dodd Frank, that no amount of regulations and regulators can prevent unreasonable risks. Regulatory investigators were practically living at JPMorgan while the London “Whale Trades” were going on. Only systemic change, involving making banks smaller and simpler, can create the kind of systemic change the is really being sought. Citigroup is not just fully integrated with investment banking, commercial, and retail operations, it is scattered across most of the globe. There is no way one management team can keep up with Singapore, Spain, and California at the same time. Investors seem to agree, as at the current price Citigroup stock is selling at just 41% of book value. Bank of America (NYSE: BAC), like Citigroup, has shown by its recent results that it may well be too big to manage, and the investment community seems also to have lost faith in management, pricing Bank of America stock at just 35% of book value.

What JPMorgan, Citigroup and Bank of America all have are stand-alone investment banks, making each of them fairly easily divisible. For instance, as of June 30, 2012, JPMorgan's investment banking unit held $830 billion in assets out of the overall consolidated asset level of about $2.3 trillion. If the investment bank were spun off or sold, there would certainly be a viable retail and commercial bank with some $1.47 billion in assets, 5,500 retail branches and another 45 branches overseas.  

Other banks, such as Wells Fargo (NYSE: WFC) and U.S. Bancorp (USB) have lower risk profiles than the aforementioned banks, with most or all of their assets tied up within their retail branch systems. Wells Fargo does operate a large independent brokerage through its branch network, but no stand-alone investment banking unit.

One certain holdout against the idea of meaningful reform will undoubtedly be Jaime Dimon of JPMorgan. Dimon actually worked under Weill during Weill's empire building days in the 1980 's and 1990's before being fired, apparently for personal reasons, immediately after the Travelers/Citigroup merger in 1998. But Dimon's power is not what it was prior to his bank's London trading losses, and unlike Weill, Dimon is obviously predisposed to protect his bank's position as its largest and perhaps most prestigious bank. This is a very much a bipartisan issue, one that might have taken on additional traction several years ago had the Treasury not been comprised of Goldman Sachs (GS) alumni. 

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