Mega banks have become too big to fail. Not just that, they have also become too big to manage, too big to regulate, too big to scrutinise, and too big to understand. Sandy Weill, architect of Citibank?s ill-advised consolidation, and long time advocate of the form of universal banking, has just pronounced the panacea for the ?too big? syndrome. The ?cure all? that he is prescribing is to break up big banks.
This is an astonishing volte face for someone who championed the elimination of Glass-Steagall Act, the regulation which prohibited investment banks to be deposit-taking institutions. He opposed the regulation while he was a banker because he was then trying to engineer a merger between Citibank and Travelers Group to create the first financial walmart: CitiGroup. Indeed, Glass-Steagall was still officially effective when Weill engineered the Citibank-Travelers merger in April 1998 for what then was a record-setting $70 billion. The deal also brought Salomon Smith Barney into fold, combining banking and brokerage in a way that would have had Shri Glass and Steagall spinning in their graves. That legal formality was taken care of in the following year with the passage of the Gramm-Leach-Bliley Act, which swept away the last vestiges of the antediluvian Glass-Steagall. The merger was prohibited at that time, so Weill had to lobby hard to get the law changed in order to complete the deal. So, at least in part, he has been responsible for the creation of mega banks. Time magazine named him as one of the top 25 people responsible for the crisis. Like his prot?g? James Dimon today, Weill was one of the fiercest opponents of banking regulation who believed that banks can mind their own shops without the regulators having to poke their nose. Now, he ironically wants the financial walmarts broken up with the help of regulation.
There are two ways of looking at his recent pronouncement. One is that he sees the error of his ways and now wants for all the right moral, social and spiritual reasons, mega banks to be cut down in size and scope. He is willing to put his personal legacy at stake by doing a volte face instead of justifying what he did as a superstar banker and CEO. Or maybe, just maybe, the reason he is willing to undo his life?s legacy is because his shares in Citi suck. A quick analysis tells us that Citi would be worth more if it is broken up. He is willing to put his legacy at stake because as a retired banker he would rather have more money in his bank account than worry about his tattered legacy. It is easy to feel sorry for Weill because shareholders of Citi, including him, have lost more than 94% of their investments from 2003 to 2012.
Citi?s shares closed Friday at $27.30. When Citi and Travelers merged in 1998, Citi?s stock hit a then-high of $35.63. In 2003, when Weill stepped down as CEO, the stock price was at $47.14. The stock had a reverse 1-for-10 split in April last year, which means that on an apples-to-apples basis, the stock price right now is the equivalent of $2.73 as compared to $47.14 in 2003. However, after Weill implored (or lobbied) last Wednesday for splitting large banks, Citi?s share price actually surged more than 8%, based on the market expectation that if Citi and other big banks are ?compelled? to split, they will be worth more.
So, our reformed Mr Weill is simply being a smart investment banker trying to profit from a demerger as it may suit him rather than being too concerned about taxpayers? money being at stake if mega banks fail. In fact, if Citi were to collapse tomorrow and if it were not to be bailed out, Citi shareholders including Weill will be the largest losers. Irrespective of what one says on TV, nobody wants to lose a fortune for so-called banking stability sake. At least not former investment bankers like Sandy Weill.
Clearly, Weill?s agenda isn?t so much about reforming the banking sector but about increasing Citi?s value, which isn?t wrong by itself, but does a huge disservice to the restoring of financial stability objective. This is a once-in-a-lifetime opportunity for regulators to cleanse the banking system of all the unproductive and uneconomic work that banks have been engaged in. The crisis is an appropriate time to make large banks accountable for the excessive risk-taking that they have been indulging in and impose capital charges for undue risks including unrestrained leverage.
Break-up or no break-up, there is no denying the fact that there are ills in the current banking system, which will continue even if mega banks are broken up, except that the risk would get ghettoised inside multiple but smaller entities. The regulators need to seize this opportunity to reform banking system rather than do cosmetic changes of splitting ownership. Demergers may benefit bank shareholders like Weill but that is not going to solve the principal problem. Weill?s recommendation is not so much as a statesman about the perils of too big to fail but as a shareholder lobbying against the drawbacks of too big to extract shareholder value.
The author, formerly with JPMorgan Chase, is CEO, Quantum Phinance
