- Last Updated: 10:41 AM, July 29, 2012
- Posted: 10:53 PM, July 28, 2012
Sandy Weill, the driving force — along with then-Treasury Secretary Robert Rubin — of creating too-big-to-fail institutions, now says he wants a mulligan.
Weill’s pushing of Citigroup into a “financial supermarket” by combining it with then-major investment bank Solomon Brothers rang the death knell for the decades-old Glass-Steagall Act. Last week, he said such deal should not be allowed.
Let’s be honest: Weill’s comments are similar to when a pilot flies you into the trees. You usually don’t listen to their safety instructions anymore.
But the former chairman of Citigroup, which was the largest bank recipient of Treasury and Federal Reserve bailout funds, was correct — for all the wrong reasons.
The banks should be broken up — that is, separating investment banking from deposits and lending — to grow an economy that is sputtering at a 1.5 percent growth rate.
Traditional banking and investment banking are very different businesses, and there is absolutely no reason that they have to be together. None.
The new investment banks would have to follow some simple rules, like far less leverage than the insane 40-to-1 in the days of Lehman, and more detailed disclosure about their opaque derivative positions.
But having the natural risk-takers back in the economy would be worth it. Taxpayer-backed deposit banks currently run around 13-to-1 leverage and can borrow from the Fed at its funds rate, which is currently zero.
Investment banks, once removed from the public trough, should run at a manageable 20-to-25 times leverage. This should be the absolute maximum.
What we will get: new jobs and far more access to credit — credit for small businesses, mortgages and car loans.
The investment banks would have to fund themselves the traditional way, by issuing bonds and preferred and common stock.
This is the very best way to get this economy going again. This is a risk worth taking. Risk is good.