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Tuesday, Aug. 7, 2012

Politics feed the big banks

Special to The Japan Times

HONG KONG — Retired multimillionaire financier Sanford I. Weill recently hit the media headlines big time when he gave his view that big banks should be broken up and strict laws separating commercial banking from more risky investment banking should be reintroduced.

The media had good reason. The 79-year-old Weill is not just any old banker in comfortable retirement given to musing on history. He was lead manager in smashing the old U.S. Glass-Steagall Act that from the 1930s until 1999 forced a separation between commercial banking and securities business.

He told CNBC: "We should probably split up investment banking from banking, have banks be deposit takers, have banks make commercial and real estate loans, have banks do something that's not going to risk taxpayer dollars, that's not too big to fail."

He joins a growing chorus of bankers, regulators and economists who say the too-big-to-fail banks are putting the United States and global economic and financial system at risk. For him and others who advocate change, the biggest problems to breaking up banks are entrenched politics.

Weill proposed a leverage ratio of 12 to 15 times for commercial banks, which critics say is rather generous for banks not heavily involved in trading business. He called for an end to off-balance sheet activities, which would mean that credit card securitizations would have to be brought on the balance sheet. He also said that only exchange-traded products should be used for hedging purposes and they should be marked to market.

Was this a Damascene conversion?

In the 1990s, Weill's determination to merge Travelers Group, the old insurance company expanded through takeovers of Aetna Life and Casualty and the vast Salomon brokerage group, with Citicorp to create modern megabank Citigroup drove the final nail in the coffin of Glass-Steagall, the by then sickly law separating commercial from investment banking. Weill's office has a wood etching of himself engraved with the words, "The Shatterer of Glass-Steagall."

Supporters of the smashing of the old barriers claim that it helped create a modern sophisticated financial system that could serve the needs of multinational clients across the whole range of financial products.

Opponents claim that, apart from helping produce astronomical salaries for bankers, liberalization also sowed the seeds of the near financial meltdown in 2008.

There was widespread general surprise, mixed in with a lot of cynicism, at Weill's conversion, especially since he did not repent of the original end of Glass-Steagall. One commentator in Huffington Post declared: "Weill has an ego the size of the bank he created. People who know him say that he needs media attention like an alcoholic needs a drink, and he's gotten precious little of it since retiring from the banking business six years ago. Yesterday made him feel like the same old Sandy."

The younger Weill was certainly a restless, even turbulent, dealmaker. Yves Smith in "Naked Capitalism" says that Weill and Jamie Dimon, then his young protege and now head of JPMorgan Chase, did 1,100 deals. Weill abruptly sacked Dimon from Citi during an executive weekend retreat in 1998.

Indeed, another cynic claims that one intention of the Weill interview was to cut Dimon to size because JPMorgan would be the biggest victim of any move to break up the too big to fail banks. "No," responds another bigger cynic; Weill it claims is afraid that Dimon's final revenge for his sacking will be that JPMorgan will gobble up Citi.

The rich and powerful of Wall Street leapt to criticize Weill. William Harrison, chief executive of JPMorgan Chase before Dimon took over, told Reuters: "It gets back to management and risk taking. You can screw that up at a small bank or a large bank."

That self-serving comment rather misses the point that if a small bank screws up, then it can more easily be picked up or allowed to fail without taxpayers suffering unduly. But when you have a JPMorgan gambling and losing $5.8 billion — and counting — it is hard for any government not to be concerned.

Governments must fear that if any big bank fails, it would have a knock-on effect and would bring down the economy. That has made it easy for the banksters to continue business as usual, collecting big salaries if their bets pay off, and let the taxpayers pick up the bill if they gamble wrongly.

Weill's conversion means that there is now an impressive list of people who advocate breaking up the big banks. They include his former co-architect of the Citi mega-merger, John Reed, who said years ago that he had made a mistake in helping Weill put together the deal, as well as Richard Parsons, former chairman of Time Warner and later of Citigroup.

A string of distinguished economists, as well as former chairman of the Federal Reserve Paul Volcker and Alan Greenspan, and present and former chairmen of regional Feds, as well as Mervyn King, governor of the Bank of England, have expressed their concern about the banksters and called for reform.

Leading American news magazines have reported that smaller community-sized banks are stepping in to lend to American companies, whereas the giant banks that received government funds are still shying away from lending.

As an amusing sidelight on the way the wind is blowing, an article in last week's Barron's, a leading journal of capitalism, declares that "Banks are the Achilles' heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government,such as by taxpayers.

Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks."

But the prevailing hostile wind to the banksters runs headlong into politics and politics. There is deep entrenched resistance among bankers in Wall Street, who earn mega-million pay packages and who are well connected to the ruling politicians both in the White House and on Capitol Hill.

More important, money talks. And the big money from Wall Street helps to fund the campaigns of both the leading presidential candidates and of many leading politicians in Congress.

"The power of Wall Street in Washington is unmitigated," said Richard Parker of Harvard University's Kennedy School of Government.

Kevin Rafferty is editor in chief of PlainWords Media.

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