Jul 26, 2012
Former Big Bank CEO Says We Should Split Up Big Banks
Deregulation of banks one factor of the housing market and stock market collapse in 2008
It’s amazing how many solutions people have once they are no longer in a position to actually do anything about the problem.
My jaw hit the floor this morning when I read the headline, “Ex-Citigroup CEO Sandy Weill: Split Up the big banks.” I couldn’t believe it and I still can’t believe it. Former Citigroup chairman and CEO Sandy Weill is a man who is not only largely responsible for the mortgage mess (by way of his involvement with CitiGroup) but is one of the people who helped repeal the Glass-Steagall Act that helped create the too big to fail bank problem and he thinks we need to split the banks up now?
His exact words were, “What we should probably do is go and split up investment banking from banking. Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that's not going to risk the taxpayer dollars, that's not too big to fail."
There’s not enough space in this blog to explain the entire story, but one of the biggest things that led to the housing market and stock market collapse in 2008 was the deregulation of banks. There used to be a long list of rules that governed what banks could and could not do and one of the most important was the Glass-Steagall Act of 1933.
It prevented banks that gave out mortgages from also engaging in trading. If the act—as originally intended—were still in place today, mortgage backed securities and derivatives wouldn’t be allowed at banks, Chase wouldn’t have been able to lose $5.8 billion in trading and banks wouldn’t have trillions of dollars in assets.
It’s true that when President Bill Clinton signed the Graham-Leachy Act in 1999, which effectively took out Glass-Steagall, so much deregulation had already gone on that the act had no real power on bank regulation.
But Weill and CitiGroup played a big role in the aspects of deregulation that made Glass-Steagall useless. To make a long story short, Weill is a man who made millions or even billions by raking American homeowners over coals with mortgage-backed securities.
His statement on CNBC that the banks should be broken up so that they can’t continue this process where the only winners are bankers and the only losers are American taxpayers is a no brainer for anyone on the losing side.
Allowing one bank to sell us our mortgages and then sell those mortgages as securities to investors is a terrible idea. When banks sell off the mortgages to investors there is no incentive for them to help you if you fall behind on payments. They’ve already cashed out on the loan twice (once by selling it to you and again by selling it as a mortgage-backed security to the investors) and they don’t make any money from your mortgage payments.
At the same time, there’s lots of incentive for them to foreclose on you, because they get to boot you out of your home and start the process over with someone else.
What Weill said makes great sense. Everyone on the side of consumers has been saying that the big banks need to be broken up for years. It’s just unfortunate that he’s only decided to say it now that he’s an ex-CEO.