Watch Out

A significant number of the wizards who put together the giant banks now “too big to fail” are having second thoughts.  “Sandy” Weill, the key player in setting up Citigroup, for example, recently proposed on CNBC, “we should probably . . . 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.”

He added:  “I think the earlier model was right for that time.  I don’t think it’s right anymore.”  But what is different now?

Earlier there were lucrative deals that ended up making Weill a very rich man, along with many M&A specialists.  As a result, though, we now have banks that are bloated, rife with competition, fraudulent practices and incompetence, obviously unable to manage their internal complexity.  But did it ever work?

According to The New York Times, the answer is a resounding “No.”  “By the mid-2000s, Citigroup was a flop. The business synergies never materialized and the stock was lagging.”

Moreover, “Throughout the 2000s, Citigroup was riddled with scandal. It settled with the Federal Trade Commission over deceptive practices. Its CitiFinancial unit was embroiled in predatory lending controversies before it was fashionable. The bank was an entwined backer of both Enron and WorldCom. Citigroup employed Jack Grubman, who was at the heart of the research conflict-of-interest scandals of the early 2000s . . . . Things got so bad that the otherwise somnolent Federal Reserve actually banned Citi from making any more acquisitions while it sorted out its mess.”  (See, “As Banking Titans Reflect on Their Errors, Few Pay Any Price.”)

Weill is not the only banker now publicly questioning the wisdom of these behemoth banks.  Philip Purcell, the former chief executive of Morgan Stanley and David H. Komansky, the onetime leader of Merrill Lynch, two other main figures in the fight to repeal Glass-Steagall, have echoed similar concerns about deregulation.  And John Reed who jointly managed the original Citibank merger in 2000, called it a mistake in 2009.  (See, “Weill Calls for Splitting Up Big Banks.”)

The bankers with second thoughts may have another concern apart from the safety of the global financial system:  the listless stock values of Citigroup and the other big banks.  Big banks may promise big synergies, but they have not delivered.  Investors, mindful of the problems managing banks on such a scale, have not been enthusiastic.  The Times commented,“Both Mr. Weill and Mr. Purcell noted that cleaving apart big banks would improve their stock market values.”

In other words, back then creating the behemoth banks was a way for their top executives to make a bundle of money.  Breaking them up now would be a way to make another bundle.  One has to wonder if, without such a motive, would the industry elders be speaking up?

When the elephants dance the ground gets trampled, and the smaller animals had better watch out.