The name Sanford Weill probably doesn't mean much to the average
bank customer, but if you are a U.S. account-holder -- or even just
an American taxpayer -- he has probably had an impact on your
Weill was one of the leading architects of the mega-bank model,
the vision that combining traditional banking with speculative
investment activities would lead to bigger and better financial
services companies. By now, you probably recognize how that idea
And to his credit, Weill seems to recognize it too.
The brave new world of banking
As the 20th century drew to a close, banking seemed to be
entering a brave new world. Through a series of mergers and
acquisitions, a new wave of giant institutions were emerging. Weill
co-headed Citigroup, which was formed as a result of a merger of
Travelers and Citicorp.
At the same time, Weill and other major banking figures lobbied
for the repeal of the Glass-Steagall Act, a Great Depression-era
law that separated a bank's deposits from its investment
activities. The premise was that profits from investments could
help subsidize a bank's deposit business, allowing banks to offer
higher rates on savings accounts
and other perks such as free checking.
Instead, within a decade of Glass-Steagall's repeal, the mix of
guaranteed deposits with highly-speculative investments led to a
financial crisis that would have caused a systemic collapse -- if
not for massive government intervention. While stopping short of
apologizing, Weill now acknowledges that the mega-bank model may
not be best for the industry going forward.
As conversions go, this ranks just slightly below Saul on the
road to Damascus or Robert McNamara's admissions about the Vietnam
War. In short, Weill may once have been part of the problem, but
precisely because of this, his view of the solution is something
The simplicity of separation
Speaking recently on CNBC, Weill stated that the best idea now
might be to fully separate traditional banking and investment
activities at financial institutions. This would mean that
depositor money would no longer fund investment activities and
deposits would no longer be endangered by investment losses. As a
result, both the FDIC insurance pool and taxpayer money (in the
form of potential bailouts to troubled institutions) would also be
saved from paying for those investment losses.
In essence, it would be a return to the world of Glass-Steagall.
In theory, savings accounts might offer a little less interest
under that scenario, and more checking accounts would charge
because they could no longer be subsidized by investment profits.
However, both of those things have happened anyway in the aftermath
of the financial crisis.
Total separation is a much simpler solution to implement than
the complex web of regulation decreed by the Dodd-Frank Act. That
simplicity might actually benefit bankers, customers and taxpayers.
After all, Glass-Steagall worked effectively for about 60 years.
Take it from someone who knows -- namely, Sanford Weill.