Voices on Both Sides of the Atlantic Call for Restoring Glass-Steagall

By Pam Martens: September 5, 2012 

Creating a timeline of some of the major voices and media that are now calling for the restoration of the Glass-Steagall Act, separating Wall Street trading firms from commercial banking, exposes interesting new insights.  Most notably, the New York Times editorial page did not admit its mistake in supporting the repeal of the legislation, or offer an apology to the public, until Sandy Weill had effectively given the break-up of banks his blessing on CNBC. Why is it that the New York Times needed the nudge from Weill. 

Also insightful is the Bill Moyers’ interview with John Reed, who co-chaired Citigroup with Sandy Weill. Reed candidly confirms what many of us have suspected for a long time.  Repealing the legislation that had kept the financial system safe for almost seven decades was motivated by visions dancing around in Weill’s head of getting very rich. 

And finally, we learn from the July 27, 2012 editorial in the Financial Times that the very lobbying machine that the newly reformed reformers helped to put in place, may be the greatest threat to restoring Glass-Steagall.  

Excerpts from some of the milestones along the path to restoring Glass-Steagall: 

May 2011: Restructuring the Banking System to Improve Safety and Soundness, By Thomas M. Hoenig, President and CEO, Federal Reserve Bank of Kansas City, and Charles S. Morris, Vice President and Economist, Federal Reserve Bank of Kansas City 

“This proposal to reduce costs and risks to the safety net and financial system has two parts.  The first part proposes to restrict bank activities to the core activities of making loans and taking deposits and to other activities that do not significantly impede the market, bank management, and regulators in assessing, monitoring, and/or controlling bank risk taking.  However, prohibiting banks from engaging in activities that do not meet these criteria and that threaten financial stability would provide limited benefits if those activities migrate to shadow banks.  The second part proposes changes to the shadow banking system by making recommendations to reform money market funds and the repo market.” 

March 16, 2012: Bill Moyers Interview on PBS With John Reed, former Co-CEO of Citigroup 

JOHN REED: [Speaking about the repeal of Glass-Steagall.] “No one that I’m aware of saw it clearly. You point out to some Senators and Congressmen who did, but somehow we described them as being peripheral. And I simply said, ‘They’re wrong.’ Turned out they weren’t…

“Sandy Weill. I mean, his whole life was to accumulate money. And he said, ‘John, we could be so rich.’ Being rich never crossed my mind as an objective value. I almost was embarrassed that somebody would say that out loud. It might be happening but you wouldn’t want to say it.

“But you know, the biggest bonus I had ever received when I was at Citi was three million dollars. The first year I worked with Sandy it was 15 [million]. I said to the board, ‘I’m the same guy doing the same job, same company. There are two of us. The company’s bigger but there are two of us. What’s going on?’ ‘Oh, you don’t understand.’ And it was just a totally different culture. And see, Wall Street developed that culture.” 

July 3, 2012: Restoring Trust After Diamond, Editorial, Financial Times

“The government [of Britain] accepted the principle of separation last year when it endorsed the conclusions of the banking commission presided over by Sir John Vickers. This argued for an internal split rather than a total separation on the basis that the diversity of assets within a universal bank could be a source of strength at times of financial stress.

“While the FT supported those conclusions, we are now ready to go further. For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall-style lines.” 

July 7, 2012:  Liborgate Could Trigger Crucial Banking Reform, By Liam Halligan, Chief Economist at Prosperity Capital Management, The Telegraph UK

“In recent days, as public disgust at Liborgate has grown, so have the cries for structural reforms. Former Labour City Minister, Lord Myners, has just acknowledged we need ‘complete separation’. Andrea Leadsom, a talented Conservative MP and former senior banker, now says the Government’s ‘ultimate guarantee of retail deposits … should not extend to high-risk transactions’.

“Professor John Kay, one of the UK’s few world-class academic economists, backs Glass-Steagall. So does Terry Smith, a City businessman with a well-deserved reputation for being proved right on the big financial issues. The late Sir Brian Pitman, too, one of the legends of UK retail banking, used his last ever newspaper interview, with me as it happens, to make the case for Glass-Steagall.

“The British public is desperate to see measures that tame our banks and make our financial system safer. We’ve reached a historic crossroads.” 

July 8, 2012: I Too Fell for the Diamond Myth, Martin Taylor, former CEO of Barclays Bank and member of the Vickers Commission, OpEd in the Financial Times 

“I decided that it was neither safe nor sensible to have trading businesses mixed up in a retail and commercial banking group. Vastly more evidence has since accumulated in favour of this argument. Aligning public and private interests has proved impossible, and so in the crisis taxpayers suffered as well as shareholders – exactly the problem that the Vickers proposals address. 

“In October 1998, I put to the Barclays board…some ways of thinking about disentangling the two businesses. They seemed not to want to know. In those circumstances, I told Andrew Buxton, my chairman, I could not stay much longer. We agreed I would stay one more year, to allow time to find a successor. Within a matter of weeks it was clear that our strategic disagreement was so deep as to make cohabitation of any kind unworkable, and I left.”

July 25, 2012: Sandy Weill Appears on CNBC Recommends Breaking Up the Banks 

“So I think what we should probably do is go and split up investment banking from 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 gonna be too big to fail.” 

July 27, 2012: The Big Banker’s Change of Heart, Editorial, New York Times 

“While we are on this subject, add The New York Times editorial page to the list of the converted. We forcefully advocated the repeal of the Glass-Steagall Act. ‘Few economic historians now find the logic behind Glass-Steagall persuasive,’ one editorial said in 1988. Another, in 1990, said that the notion that ‘banks and stocks were a dangerous mixture’… ‘makes little sense now.’

“That year, we also said that the Glass-Steagall Act was one of two laws that ‘stifle commercial banks.’ The other was the McFadden-Douglas Act, which prevented banks from opening branches across the nation.

“Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”

July 27, 2012: Breaking Up the Mega Banks, Editorial, Los Angeles Times

“Former Citigroup honcho Sanford I. Weill is widely seen as the man most responsible for the rise of ‘too big to fail’ banks and, by extension, for the enormous federal bailouts they received in 2008 and 2009. This week, however, Weill shocked the financial industry when he said that megabanks should be broken into smaller pieces, separating the arms that take federally insured deposits from the ones making bets on Wall Street. Lawmakers resisted such a straightforward approach when they enacted the Dodd-Frank law to re-regulate the financial industry in 2010. But Weill’s hindsight should prompt them to consider again how best to protect Americans from a repeat of the last meltdown.”

July 27, 2012: Sandy Weill Stages An Epic Conversion, Editorial, Financial Times

“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…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…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.” 

August 1, 2012: It’s Time to Break Up the Massive Banks, By Georg Mascolo, Editor in Chief of Der Spiegel, the popular German weekly news magazine, with one of the largest magazine circulations in Europe. 

“…yes, such a division would create problems for an institution like Germany’s Deutsche Bank, which as both an investment and commercial bank would be forced to pursue a new business model. Still, the advantages by far outweigh the disadvantages. 

“So far, any halfway sensible reform of the financial world has failed because of opposition from Wall Street, the City of London or political forces like Germany’s business-friendly Free Democratic Party. Politicians still believe they can honor their pledge to stop the kind of banking excesses that led to the crisis, but so far nothing has happened. 

“It may be true that the old dual banking rules wouldn’t be able to function today as they were written decades ago, but they could be adjusted to fit with the current financial world. It would require craftsmanship, but it could and must happen quickly. 

“Incidentally, the Glass-Steagall Act was only made possible because a Senate committee had exposed the dumb, risky and at times criminal behavior of banks in the run-up to the Great Depression. The outrage paved the way for the law. Sometimes history repeats itself. Glass-Steagall served the world well for decades and it would have been better if it had never been repealed. 

“It is high time to correct this error.”

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