Counterparties: The clarifying effects of CEO retirement

By Ben Walsh
July 26, 2012

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It was a comment that launched a thousand strained attempts to capture its essential absurdity. Sandy Weill, the man who broke the wall between commercial and investment banking, the architect and former chief executive of Citigroup, has decided the whole thing is now a bad idea:

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.

That’s a massive reversal for a man who two years ago hung a “hunk of wood – at least 4 feet wide – etched with his portrait and the words ‘The Shatterer of Glass-Steagall’” in his office. Even then things had changed: Citi was in a shambles, and Weill had gone from the pioneer of an economic boom to an early harbinger of the dangerous financialization of the American economy.

Weill, it turns out, is not the only now-retired finance chief to have second thoughts. The American Banker has a list of other prominent proponents of breaking up the big banks. Phil Purcell, former CEO of Morgan Stanley; John Reed, former chairman of Citi; David Komansky, former CEO of Merrill Lynch — each one is on the list. Dick Parsons, another former Citi chairman, isn’t on American Banker’s list, but he should be.

The public mood toward finance has shifted dramatically, but so has the employment status of each of these men. Parsons’s post-retirement alacrity was particularly bold: It took him just three days away from Citi’s board to have second thoughts. It seems that once you receive the banking chieftain’s version of an AARP card, repressed doubts about the value of your life’s work emerge. Or perhaps your incentives (and ego inflation) now come from public plaudits and not compensation.

Lining up against Weill et al to defend big banks is former senator Phil Gramm, the co-author of the bill that retroactively legalized the merger that created Citigroup. He’s joined by Rodge Cohen, the Sullivan & Cromwell rainmaker famous for advising numerous bank CEOs through the financial crisis. Wells Fargo Chairman and CEO Richard Kovacevich disagrees based on Rumsfeldian existentialism: “Investment bankers are risky, not investment banking”. Other big-bank CEOs have been silent, but they might say they’ve already addressed the matter – they’re not too big to fail, because they have filed a piece of paper with the Fed saying they can fail.

It will take more than armchair advice from former titans, it seems, to persuade current big-bank executives that Weill is on to something. It will take demonstration of real economic gain: Even if Jamie Dimon “can’t imagine” that any unit of JPMorgan would be more profitable alone, the idea of more than doubling shareholder value could, one suspects, catch James Gorman’s eye. – Ben Walsh

On to today’s links:

EU Mess
Germany’s finance minister declares that markets are wrong, then goes on vacation – Bloomberg
Draghi’s bazooka: The ECB will “do whatever it takes to preserve the euro … believe me, it will be enough” – Bloomberg

The “Garbage Indicator” has something very grim to say about US GDP – Business Insider

“Brokers are being paid 12% to put your money into these private vehicles that are opaque, illiquid and frankly, unnecessary” – Josh Brown

Ron Paul’s “audit the Fed” bill passes the House, paving the way for certain death in the Senate – Yahoo News

BlackRock, Fidelity and Vanguard considering legal action against banks – Bloomberg

Surprisingly Difficult
Pop quiz: British Olympian or London Tube stop? – Slate

Takedown of a Takedown
Jason Linkins rips the dismissive review of Bailout by the NYT‘s Jackie Calmes – Huffington Post

That Better Get Better Fast
In 29 states, companies can still legally fire a worker for being gay – WSJ


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Investment banking shouldn’t be called banking, as it is investment brokering, or sometimes, when a firm wants to take a side instead of just being the bookmaker, investment gambling.

I am in favor of letting banks do what they want, as long as they are not borrowing from the Fed or FDIC insured banks, or have their deposits insured by the FDIC. If they can get enough people to put money in their banks with those conditions, good for them.

Posted by KenG_CA | Report as abusive

Why the about turns? Positioning, positioning. Don’t forget there may be new jobs coming up after the elections in November and these old CEOs might want that thing money can only influence: personal power in Government.

Having said that, I think they are right, there should be a split.

Posted by FifthDecade | Report as abusive

In response to Kovacevich, both investment banking and investment bankers are risky. The profession is too risky, and a risky practice by one firm will probably set off a slide towards risky practices by all firms less they displease their investors. And besides which the sorts of people attracted to investment banking are risk inclined.

And what does he care anyway?? Wells is mainly a retail bank. A very big one, but mostly a boring and well-run one. IIRC it owns Wachovia’s leftover investment bank, but that is mainly because it bought Wachovia. That is precisely why I invested in Wells, by the way (consider that my required disclosure). And I hope that Wells stays that way. It was making money turtle-style, not hare-style. And I’m fine with that.

Posted by weiwentg | Report as abusive