Sandy Weill takes credit for putting the final nail in the coffin of Glass-Steagall. Weill parlayed ownership of a two-man brokerage into a position atop Citigroup. As chairman and CEO of Citigroup, he commanded the towering heights of American finance. He was the man who who invented the 'financial supermarket,' incorporating commercial banking, investment banking, securities trade, and life and general insurance. Now he says it was a mistake and that commercial banking and investment banking should be separate.
Sanford I Weill was born in Brooklyn, one of New York City's five boroughs, the son of two Polish-Jewish immigrants. The 'I' doesn't stand for anything. His mother though he could add something to it later in life. When he started dealing on the New York Stock Exchange, the only customers he had at first were family members. Eventually, through years of furious deal making, he controlled the second largest brokerage on the exchange. But further expansion was thwarted by Glass-Steagall.
Glass-Steagall is more properly known as the Banking Act of 1933. When mention is made of Glass- Steagall, it usually refers to the sections of the Act that forbid combining investment banking, including insurance, and commercial banking. The aim was to separate the trading functions of investment banks from the deposit taking functions of commercial banks. Investment banks are typically highly leveraged, often 30 or 40 times. This is more or less the equivalent of going to the races and betting with someone else's money. The idea was that Main Street would have somewhere safe to put its money while Wall Street could get on with the more risky trading and deal making.
Weill's aim was to create the first financial supermarket by backing his Traveler's group into Citibank. This model is also referred to as 'bankassurance'. The idea is that synergies will be gained through cross-selling. For example, if someone gets a loan for a property, you sell them an insurance policy. Anyway, it didn't work. Citigroup was dismembered.
However, by that time, through the combined efforts of Wall Street's bankers, led by Sandy Weill, Glass Steagall was repealed and replaced by the Gramm-Leach-Bliley Act, which was signed into law by President Bill Clinton in 1999. This allowed firms to combine both investment banking and commercial banking activities. It meant highly leveraged firms which were gambling on the markets were also the custodians of Main Street's savings. Firms no longer bothered to pretend they were mere order takers and began a massive move into 'prop trading' or proprietary trading on the firm's account.
Sandy Weill proposes unscrambling the omlette. Could Glass-Steagall be reinstated? Doubtful. Even Paul Volcker, the former chairman of the Federal Reserve Board, with has massive political and market authority hasn't been able to separate prop trading from commercial banking. Are the Citigroups of the American finance too big to fail? Probably. When Lehmann Brothers went to the wall it almost took the world's financial markets with it. Not an experience American regulators would like to repeat. It would be a very brave man who introduced a bill to break up Citigroup. Unscrambling this omlette is going to take a lot more resolution than America's lawmakers have shown so far.
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