Wall Street’s Fatal Flaw: Confusing “Disruptors” With “Corruptors”

By Pam Martens: May 19, 2015

Sanford (Sandy) Weill, the Man Who Put the Serially Charged  Citigroup Behemoth Together

Sanford (Sandy) Weill, the Man Who Put the Serially Charged Citigroup Behemoth Together

In the late 1990s, Salomon Smith Barney’s telecom analyst, Jack Grubman, was viewed by his powerful firm as a “disruptor.” He was throwing out the old rules on how a telecom analyst should interact with a company on which he was delivering research to the public and creating a new, innovative model. Instead of following the old rules and remaining pristinely independent and objective, Grubman was sitting in on board meetings at WorldCom, giving investment advice to its executives, while simultaneously issuing laudatory research to induce the investing public to buy the stock.

When BusinessWeek questioned Grubman on this new analyst model on May 14, 2000, here’s how the disruptor explained his redesign of his job:

 “What used to be a conflict is now a synergy…Someone like me who is banking-intensive would have been looked at disdainfully by the buy side 15 years ago. Now they know that I’m in the flow of what’s going on. That helps me help them think about the industry…Objective? The other word for it is uninformed.”

Grubman was seen by himself and his firm as a disruptor not because his model made any sense, but because it was bringing in hundreds of millions of dollars in deals for Salomon Smith Barney. Grubman, in turn, got his piece of the action. According to the SEC, between 1999 and 2002, Grubman’s compensation exceeded $67.5 million. Grubman was, in fact, a corruptor not a disruptor. Many of the companies he recommended went bust. The SEC barred him from the industry for life and fined him $15 million for issuing fraudulent research.

Around the same time that Grubman was corrupting research practices on Wall Street, his big boss, Sandy Weill, was peddling the idea to the media, Congress and regulators that he was a genius disruptor as well. He wanted to tear down the old regulatory walls separating FDIC-insured banks from their gambling-casino cousins, the Wall Street investment banks, and create a financial supermarket called Citigroup. Behind the scenes, however, it was really just about money – money for Sandy Weill.

According to a Bill Moyers interview on PBS with John Reed, the former CEO of Citibank – the insured-depository bank that Weill had selected as a merger partner – Weill had explained the outcome of the merger thusly: “John, we could be so rich.”

Disruptors are apparently an easy sell – even when saner voices from the public are screaming “corruptor.” On April 8, 1998, the following appeared on the Times editorial page:

“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”

One year later, in 1999, Congress repealed the depression-era legislation, the Glass-Steagall Act – legislation which had prevented a collapse of the U.S. financial system for 66 years. After Glass-Steagall’s repeal, it took only 8 years for Wall Street to collapse the financial system, taking down century-old Wall Street firms and the U.S. economy.

Weill retired as CEO of Citigroup in 2003, walking away with a cumulative $1 billion in compensation, including stock grants. Weill didn’t step down as Chairman until 2006. Citigroup collapsed in 2008 and required the largest taxpayer bailout in the history of the United States: $45 billion in an equity infusion; over $300 billion in asset guarantees; and more than $2 trillion in secret, below-market rate loans from the New York Fed.

In 2013, the Government Accountability Office (GAO) released a report on the long-term impact the 2008 financial collapse was likely to have on the nation. According to the GAO, cumulative output losses could exceed $13 trillion. The GAO researchers wrote:

“Some studies describe reasons why financial crises could be associated with permanent output losses. For example, sharp declines in investment during and following the crisis could result in lower capital accumulation in the long-term. In addition, persistent high unemployment could substantially erode the skills of many U.S. workers and reduce the productive capacity of the U.S.”

Was there no one around in that era that could differentiate between innovative disruptors  and plain ole greed-driven corruptors? At the Federal Reserve’s June 25-26, 1998 hearings to take public comment on the merger to create Weill’s financial supermarket to be called Citigroup, members of the public clearly recognized a corrupted business model as well as a corrupted process.

Matthew Lee, a lawyer representing Inner City Press/Fair Finance Watch testified as follows:

“…we think [the merger application] should be dismissed based on improper communications that have taken place between Travelers, Citicorp and the Federal Reserve Board. Prior to the deal even being announced and the application being submitted, not only did the two CEOs of the two institutions meet with Chairman Greenspan, we found that, in fact, there was very detailed preapproval sought for particular practices…We think it is tainted.”

Mark Silverman of Citicorp-Travelers Watch, a coalition of community groups formed at that time to scrutinize the proposed merger, testified as follows:

“…the merger is illegal.  The affiliation between Citibank, as a member bank of the Federal Reserve Board and Travelers’ subsidiaries that are engaged principally in securities dealings is simply prohibited by the Glass-Steagall Act…If the Board approves this merger prior to any change in the law, Congress, pressured by Citigroup and concerned about the consequences of a forced divestiture, can enact one of the most embarrassingly blatant pieces of private-interest legislation in recent memory…the Board risks undermining the legitimacy of itself and the legislature..”

Hilary Botein, at the time Associate Director of the Neighborhood Economic Development Advocacy Project (NEDAP) said the Federal Reserve Board would “make a mockery of the regulatory process by allowing Citicorp and Travelers to brazenly violate existing law.”

Sarah Ludwig, then Coordinator of the New York City Community Reinvestment Task Force stated that if the Federal Reserve signed off on the merger it would “constitute an affront to the public, and underscore that large and powerful corporations influence government decision making even to the point of obtaining approval on illegal transactions…Secondly, approving the application would constitute hideously unsound policy….”

Josh Zinner, a lawyer at the time with South Brooklyn Legal Services’ Foreclosure Prevention Project, testified as follows:

“We represent low-income seniors who have been ripped off by high-rate finance companies… We haven’t heard any testimony today about Commercial Credit Corporation. This is an entity of Travelers Group…This type of high-rate lending that Commercial Credit does can often lead to foreclosure, if abusive, and, in fact, the Primerica Financial Services [also owned by Travelers] is selling Commercial Credit loans in the billions of dollars using this completely, loosely-regulated sales force with the same sort of A.O. Williams evangelical fervor.  Again, the data shows, and this data will be submitted with a comment that Commercial Credit does high-rate lending in the same communities that Citibank has been redlining… the engine for marketing Commercial Credit loans is an unregulated pyramid scheme…”

I took off the day from work to protest against this insane business model outside the New York Fed on June 26, 1998. Myself and others were invited inside to testify on a panel that had extra space. Below is an excerpt of my remarks that day:

“It is amazing how soon we forget.  It was just 60 years ago that 4,835 of America’s banks went broke and closed their doors, leaving shareholders and depositors destitute. The underlying reason that this happened was the lack of moral courage by our regulators and elected representatives to just say no to powerful money interests. Instead of just saying no, Washington handed the banks the equivalent of an ATM card to the Feds discount window to speculate in stocks.

“At a time when Japan, the second largest industrialized nation, is reliving the 1930s in America, complete with banking insolvency, it is amazing and preposterous that we should be discussing rolling back Glass-Steagall.

“We also want to remember that the political dynamics that created the backdrop for the banking meltdown in the ‘30s grew from a corrupt cozy culture between Wall Street and Washington. U.S. Supreme Court Justice William O. Douglas, (who knew a thing or two about the matter, having just served as chairman of the young, new SEC, before he went to the Supreme Court) called it what it was, chicanery and corruption.

“Frank Vanderlip, coincidentally, an actual former president of National City Bank, wrote in the Saturday Evening Post at the time that lack of separation of banking and securities contributed to the stock market losing 90 per cent – I’d like to repeat that, 90 per cent – of its value from 1929 to 1933. The public was so sickened by the hubris and corruption that an entire generation stayed away from the stock market.  It was not until 1954, 25 years later, that Wall Street once again reached the level it had set in 1929.

“There is a compelling body of evidence that suggests a corrupt cozy culture has once again enveloped the brains of Washington. We can hardly look to the safe keepers of the public trust when they are falling over themselves to reap campaign windfalls from Wall Street.”

Next month it will be 16 years ago that myself and the others pleaded for sanity in banking regulation; appealed to the regulators not to repeal the Glass-Steagall Act. In that span of time, iconic Wall Street names like Bear Stearns and Lehman Brothers collapsed and disappeared; Freddie Mac and Fannie Mae were taken over by the Federal government to prevent their collapse, ballooning the nation’s debt; over $13 trillion in low-cost loans were sluiced into global banks and brokerage firms by the Federal Reserve (without approval from Congress); the Federal Reserve has engaged in three rounds of quantitative easing and now sits with a balance sheet of $4.5 trillion, attempting to undo its fiasco of repealing the Glass-Steagall Act and prevent the U.S. economy from slipping into a full-blown deflation and depression.

As part of its efforts to resuscitate the economy, the Federal Reserve has kept short-term interest rates in the zero-bound range since December 2008. During those six years, seniors living on fixed-income have watched their interest income on investments like Certificates of Deposit and Treasury Notes and Bills shrink to a fraction of what it was before the crash. Belts have been tightened by seniors, then tightened again, and again, and again.

Now we learn that Citigroup, the tyrannical, untamable, unremorseful bank that started this whole mess is about to become, along with other banks, an admitted felon, pleading guilty to criminal charges of currency rigging. And what’s holding up the settlement announcement is not negotiations to break up these serial lawbreakers but negotiations with the SEC to make sure they can still carry on all of their regular business activities despite being felons.

Against this backdrop of unprecedented hubris and corruption, there are 535 members of Congress – 100 in the Senate and 435 in the House of Representatives – the vast majority of whom will not go near the proposed legislation to restore the Glass-Steagall Act – the only means of saving ourselves and future generations from this endless financial nightmare.

Bookmark the permalink.

Comments are closed.