By Martin Tillier
As I write, Sandy Weill, the former Chairman and CEO of Citigroup (C) is on CNBC’s Squawk Box and my jaw is on the floor. Let’s make this clear. The man who famously had an etching of himself engraved with the words “The Shatterer of Glass-Steagall” has just said that large banks should separate their deposit taking and investment banking arms. In other words, some form of Glass-Steagall should be re-introduced. Like Dr. Frankenstein, it seems that Mr. Weill has belatedly realized that he may have created a monster.
By 1998 Sandy Weill had, by mergers and acquisitions, built Travelers Group into a huge, multi-layered insurance, investment banking and brokerage company. The $76 Billion dollar merger with Citicorp in that year looked to complete the puzzle. There was only one problem. At the time, Federal law expressly forbade the merging of banking and insurance businesses. Weill went ahead anyway, correctly assuming that Congress would soon change the law. They did, by enacting the Gramm-Leach-Bliley Act in 1999. For those who weren’t around then it should be made clear that the relevant parts of this act were not particularly controversial at the time. There was widespread, bi-partisan agreement that the move was needed to keep pace with European and Asian banks. Only the inclusion of the Community Reinvestment Act was controversial. The problem is that “It seemed like a good idea at the time . . .” is a poor excuse even for a child. I am as guilty as anybody. Those of us in the Foreign Exchange market back then may have complained that the ensuing mergers would cut our customer/counterpart base, but none of us saw it as dangerous.
The events of 2008-9 changed all that.
Commentators with 20/20 hindsight emerged everywhere, claiming that calamity and collapse were inevitable and predictable. They weren’t. Large corporations leveraging deposits to create trading profits, rather than using them for low return commercial loans made sense. These were publicly traded companies whose responsibility was to their shareholders, and whose task was to maximize profits. Whose fault it was, and whether or not it was predictable, are not relevant here. The point that Mr. Weill made this morning, and I agree with him, is that the increased scrutiny that resulted has changed the game. I have made the point before that individuals need to take on some risk to make money in the markets. Well so do banks. When every move is analyzed from the perspective of “what are they doing with my money?” it is hard for these institutions to perform their role in the capital markets effectively.
Moves to break up the mega financials such as Bank of America (BAC), Citigroup (C) and JP Morgan Chase (JPM) are generally seen as a reason to sell the stock. I am not saying it isn’t . . . in the short term. If Sandy Weill’s comments prove to start a groundswell for a return to Glass-Steagall, however, it may represent an opportunity. In the event of a split, investors would get to choose their poison. The investment banking and trading arms will be free to take on the risk they feel necessary, without every loss being public property. The retail divisions can go back to the boring stability of deposit and loan business, and may even be allowed to offer decent dividends again. Either one could become a good, undervalued investment.
Of course, one man’s opinion, even when that man is Sandy Weill, does not guarantee change. One imagines the industry will fight hard to resist a break up, and they are a very powerful lobby. The point Mr. Weill made consistently this morning, however, is that the world has changed. Size really was the key then, whereas specialization may be more beneficial now. I believe he is right once again, and should Congress or the President consider reform after the election, be on the lookout for bargains in the financial sector. It could well be a classic case where selling the rumor and buying the fact would be the correct strategy.