Glass-Steagall breaker wants to separate banks

Cries to reinstate Glass-Steagall have come from grass roots as well as from former opponents, doing an about-face. Image: sharonkubo/Flickr/CC BY

In an ironic reversal, the man who worked to break Glass-Steagall wants to repair the wall between commercial and investment banking. However, in the post-recession, some critics say he should have let it remain intact in the first place.

Separating taxpayers from gamblers

Sanford “Sandy” Weill, 79, is the founder of Citigroup and one of the men who championed the repeal of the Glass-Steagall Act in the late 1990s. Glass-Steagall was a legislative act born in 1933 out of the economic wreckage left by the stock market collapse four years earlier. It created a separation between investment banks, with their high-stakes gambling, and federally-guaranteed commercial banks.

Breaking the barrier

Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1999. That legislation was signed into law by President Bill Clinton, who famously said Glass-Steagall was “no longer relevant.”

Many economic analysts believe, however, that the repeal of Glass-Steagall allowed for the creation of banking conglomerates like Citigroup, and permitted the kind of reckless trading that contributed to the Great Recession and the subsequent economic downturn. Citigroup was also the recipient of $45 billion as part of the taxpayer-funded banking industry bailout in 2008.

Rebuild that wall

Weill said, during a CNBC interview on July 25:

“What we should probably do is go and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail… So let commercial banks take deposits and make commerce loans and real estate loans… We [investment bankers] can have size and scale, but it doesn’t have to be connected to a deposit-taking institution.”

Reaction to U-turn

Sheila Bair, once the chairman of the Federal Deposit Insurance Corp., said on CNBC:

“He and his institution were in the lead in pushing for the repeal of Glass-Steagall and then, of course, Citigroup is the poster child for too-big-to-fail in the bailouts during the 2008 crisis. It is truly ironic.”

Other critics are taking it a step further, saying Weill wants his cake and the privilege of eating it, too. Legal & General Investment Management analyst David Knutson said:

“He enjoyed the benefits of the demise of Glass-Steagall and only now has he become remorseful? Where was he five years ago?”

Altruistic or self-serving?

Remorse, however, may have little to do with it. Weill also acknowledged that the mistakes of the past have tarnished the reputation of big banks in the eyes of regulators and taxpayers. That stain is likely to remain for the foreseeable future. Instead of bucking the trend of increased regulation, Weill and other industry leaders are seeking to create a playing field that is not subject to the full brunt of such restrictions. A playing field that would allow investors to gamble, while simultaneously sparing the taxpayers the burden of their folly should things go south.

Glass-Steagall, many believe, kept the nation from experiencing a recession for better than 40 years. Its reinstatement, whether for altruistic or self-serving motives, would likely be a healthy thing for the nation’s limping economy. However, in an election year, according to the Wall Street Journal, the federal government is unlikely to take on such a politically-charged subject.