Break Up The Big Banks...What Are They Really Talking About?

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by | Dec 19, 2012

Sandy Weill, former Chairman and CEO of Citigroup, is now saying that the big investment banks should be split up.
That’s surprising commentary coming from the man who helped create the model for mega-banking. He got rich off the big-banking system, in which investment and commercial banking merged.

There were once two distinct types of banking firms: Commercial banks that focused on taking deposits and making loans. And then investment banks that issued and traded securities, stocks and bonds. Starting in the eighties, these two types of banks became integrated. Why? Because people like Sandy Weill masterminded it. Investment banks needed capital from the commercial banks for their speculative activities. The result was huge profits.

Now Weill is making an about-face. Times have changed, he says. The current risk is that investment banking won’t attract the best and the brightest. America needs a banking climate that inspires creativity, he believes. Therefore, investment banking should exist untethered from commercial banking.

Commercial banking, let’s face it, seems boring. Especially compared to high-stakes investment banking, where schemes like mortgage-backed securities can make bankers millions (until they don’t).

If investment banks want to play that game, then fine. But the public shouldn’t have to pay when the chips are down.
In good times, securities create huge profits for big banks. But in a downturn, trading losses are like sharks that feed off the assets of the bank’s commercial side. (Although now we have the Volcker Rule, which prohibits certain types of short-term speculative trading.)

Perhaps Weill is right, and a separation between old-style “boring” commercial banking and “creative” investment banking is necessary.
But do we legislate it? Will J. P. Morgan Chase, Citigroup, UBS and the other big banks adopt this new model voluntarily?
Everyone agrees that too big to fail is a dinosaur.

So where do we go from here? More government regulation on Wall Street? Or split up the big banks and give investment bankers more freedom to speculate, but on their own terms – free from the Volcker Rule, without risking assets from commercial banks? One thing’s for certain, Americans don’t want future bailouts, and it’s easy to distrust Weill’s seemingly good intentions.

Until next time…

Mary Buffett

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