July 25, 2012 / 2:30 PM / 5 years ago

UPDATE 4-Weill changes mind, calls for big banks to break up

By Jed Horowitz and David Henry
    July 25 (Reuters) - Sanford "Sandy" Weill, the tycoon who
built financial conglomerate Citigroup Inc 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 1990s smashed the U.S. law known as "Glass-Steagall"
that divided commercial and investment banking. Riskier
investment banking 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 and the shares of the biggest banks rallied.
    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 break-ups, 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, on a risk-weighted basis. 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. 
    U.S. Treasury Secretary Tim Geithner said on Wednesday that
these steps and others the United States has already taken are
    "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.
    Breaking up big banks is logistically difficult, given the
thousands of legal entities involved and thorny questions about
how to allocate existing debt across the different businesses,
for example. 
    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 U.S. 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 biggest
U.S. banks have grown even bigger compared to the overall
economy, a trend only accelerated by the financial crisis. 
    Bigger is not necessarily better, though. For the past two
years, Duke University law professor Lawrence Baxter has
researched the value of big banks. 
    In a forthcoming journal article, he concludes that large
banks have not proven to be more efficient, especially in light
of the government subsidies they receive. But he did note that
they have some advantages such as the ability to serve large
global customers. 
    "Our own study indicates no clear advantages for universal
banks at this stage," Baxter wrote. 
    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,  wrote in an
opinion piece in the Wall Street Journal last month that
shareholders would benefit. 
    Breaking up the biggest banks could double or triple the
value of the companies, Purcell wrote. Purcell long argued for
"financial supermarkets" starting with his work at McKinsey in
the 1970s, before he changed his mind. 
    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 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. Senator Sherrod Brown 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 Ohio Senator, a Democrat, said in a statement on
Wednesday: "Allowing Wall Street megabanks to grow so large and
over-leveraged ... isn't fair to taxpayers." 
    Elizabeth Warren, an outspoken consumer advocate and Harvard
law professor who is running for U.S. Senate, believes the
Senate ought to consider a return of Glass-Steagall. 
    But Brown's bill is seen as a long-shot 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 Bear Stearns Cos, who is now an adviser with
JPMorgan Chase & Co. 
    "I've known Sandy for a long time and it didn't sound like
him to me."
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