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Sandy Weill on Glass-Steagall

by Robert Teitelman | Published July 26, 2012 at 2:38 PM

So Sandy Weill. Not only does he emerge from exile, but he recants on Glass-Steagall. Bring it back! Bring me back! What should we think about this? First, a less-than-charitable response: If Weill was so wrong about the merits of combining investment and commercial banks, why is he so insightful now that he's changed his mind? Could it be possible that the ever-pragmatic Weill is talking his own book? Weill, never hyper-articulate, didn't go into details except that the banks have lost the public's trust (including in his prodigal former protégé-turned-king-of-banking Jamie Dimon; is there a touch of Schadenfreude in Weill's recantation?) and they need to simplify -- much as Weill himself has in pastoral retirement. But one comment does lead one to suspect that Weill, much of whose fortune presumably remains in still-depressed Citigroup stock, is shifting with the market. Carefully parsed, Weill is not assuming blame for anything. Rather, he's making a Zeitgeistian argument: Times have changed. If bankers want to regain trust, it might be a good idea to return to a Glass-Steagall split. Was he wrong a decade ago? "I think the earlier model was right for that time," he said.

Right for the time? What does that mean? It suggests that Weill views a banking system that should change with the Zeitgeist. When the market was rewarding consolidation and diversification -- and the junking of Glass-Steagall, by the way, began many years before Weill convinced John Reed to merge Citibank with Travelers -- Weill obviously thought it was a good idea. But the market is now, at best, down on the big banks, at least from an equity perspective. It's a very Weill-like stance: Don't fight the market. Release those values locked up in the casket of the universal bank. There is an odd dynamic in the big banks, which provides context here. Equity markets have beaten down their shares, not only relative to book value but to large, mostly retail regional banks (see The Wall Street Journal's Heard on the Street), leading to predictions from the likes of Henry Kaufman that markets will do what the government won't. Business is lousy, regulation and capital needs are rising, scandals keep breaking out, and shareholders realize they would undoubtedly be wiped out in a failure. And yet the big banks also famously (and controversially) receive a too-big-to-fail subsidy. This occurs on the debt side. Holders of debt still believe that TBTF banks will get bailed out if they get in trouble and they will, at the very least, be more senior to shareholders.

But enough about Weill. What is clear is that he has sparked a renewed bout of break-up-the-banks fever. This raises a question that has bugged me for a while: What are the politics required to return to a Glass-Steagall-like system? What we know is that serious downturns often lead to fundamental changes in banking, fueled by significant underlying alterations in the political and economic makeup of the U.S. The First and Second Banks of the United States both fell after financial panics and political realignments, and Glass-Steagall was imposed in the depths of the Great Depression. To say it another way: Scandals and recklessness often accompany these changes, but they're symptoms not causes. It's a little hard to discern whether a political realignment is taking place -- or even how transformative this slump will prove to be. There is a populist belief that the big banks should be broken up, joined by an increasing volume of academic and "progressive" policy voices. The populist anger feeds off the notion of bailouts and the image of fat cats and plutocrats; it dovetails with critiques about inequality. This anger crosses party lines -- though whether it's enough to drive real change is hard to tell. It hasn't so far. And the current politics haven't realigned; they've congealed.

Politically, the big banks retain significant reserves of support, particularly in Washington and in Congress, the administration and regulation; this also runs across party lines. (Some of this is lobbying and political capture; some of this is constituency self-interest, like in New York; some of this is belief that the U.S. needs global banks; some of this is institutional self-interest, such as the Federal Reserve, or regulatory capture.) Not surprisingly, politicians may talk a populist game about bailouts while supporting the big banks more quietly. In other words, they talk discipline and crave popular easy money. This fractious "establishment" has so far tried with legislation like Dodd-Frank to restrain the banks, boost their capital, revive regulation and write "living wills" to avoid further bailouts. What we can be sure about is that for all the grandstanding in Congress, nothing will get done before the election in November. And that for anything really transformative, such as a return of Glass-Steagall (or even a knockoff of the U.K.'s Vickers plan, a sort of Glass-Steagall-lite) would require another financial panic like 2008 with U.S. banks at the center. That's less likely, given the banks' increased capital ratios, if possible. The "conservative" forces here -- that is the big banks, their lobbyists and fellow travelers -- know how to effectively play the waiting game, which this kind of polarized and money-centric Congress enables. Delay, obfuscate and block. The populist fevers will not fully die, but they will ebb with time and the press of other issues.

You'll notice that this is a description of tactics and possibilities; it's not about the wisdom or the foolishness of one policy or the other. Perhaps I'm cynical, but there is little profound wisdom on any side of this debate; there are only tradeoffs, ambiguities, winners and losers. Breaking up the banks is complex and shot through with unintended consequences, good and bad. We are not in the '30s or the '50s anymore. There are no guarantees. In focusing on the big banks, we ignore all the other potentially dangerous sectors of finance; Lehman Brothers, Bear Stearns, AIG, Fannie Mae and Freddie Mac were not banks, after all. Financial risks extend well beyond the banks. On the other hand, carrying on as we are today produces less-than-optimal circumstances, including corruption, excessive risk taking, opacity and TBTF. Megabanks are difficult (in the longer run, perhaps impossible) to regulate and manage, particularly if your standard is growth, share performance, economic value and safety. And when they stumble, they crush innocents in their wake. Do they perform some services vital to the economy? Sure, particularly for the most sophisticated clients and customers. And retail banks are not exactly engines of growth. But in the political arena, all these are only talking points, arguments, rationales and projections: In the end it comes down to populist outrage weighed against the megastructures Weill helped pioneer. The struggle is pretty simple; the outcomes are complex and probably unknowable.

There is a kind of faux-naïve folk wisdom in Weill's notion that times have changed and banks must change as well. It's his own recognition, which is shared quietly by most politicians, that there is no perfect and Platonic banking system out there to be discovered. Perhaps they are right. Banking is a political construct, not a moral or economic one. There is no perfect mechanism. There are only outcomes. Don't tell the children. - Robert Teitelman

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