In the span of two days in July, the proposition that American megabanks should be disassembled and disarmed advanced closer to reality with remarks by two influential figures. On July 25, former Citigroup CEO Sandy Weill stunned the banking world with comments that effectively repudiated his defining career accomplishment. Although less publicized, comments made by Federal Reserve Board Governor Sarah Bloom Raskin two days earlier may carry even more influence.
Sanford Weill built the largest American bank when he merged Travellers Group and its Salomon Brothers unit with Citibank 1998. That violated Glass Steagall, the law that prohibited firms from engaging in both commercial and investment banking. But after receiving a one-year reprieve from Federal Reserve Chairman Alan Greenspan, Weill helped engineer a law abolishing Glass Steagall altogether. A dozen years and a major global financial crash later, Weill recently told an interviewer: “What we should probably do is go and split up investment banking from [commercial] 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 too big to fail.”
With his statement, Weill effectively renounced his crowning career achievement. He implicitly attested to the unmanageable risk of megabanks. Whether Weill’s pirouette will prompt Congress to restore Glass Steagall remains unpredictable. Advocates have certainly seized on his testimony.
Commenters theorize Weill may be protecting his legacy. Time Magazine named him one of 25 people responsible for the financial crash, owing to his creation of the Glass Steagall-busting megabank. With his new view, Weill joins numerous former megabank executives who call for radical reform, including bank break ups, such as: former Morgan Stanley CEO Philip Purcell; former Bank of America executive Sallie Krawcheck; former Citibank CEO John Reed; and former Merrill Lynch CEO David Komansky.
Less conspicuous, but perhaps more powerful, came a speech on July 23 by Sarah Bloom Raskin, one of seven governors of the Federal Reserve Board. She faces an upcoming vote on the proposed regulations to implement the so-called Volcker Rule, a provision in the Dodd-Frank Wall Street Reform Act that serves much the same purpose as Glass Steagall. It prohibits proprietary trading by taxpayer-guaranteed banks.