The bosses of the big global banks were undoubtedly irritated when they learned that Citigroup legend, Sandy Weill, was now calling for a break-up of the "too big to fail” banks, but they were quick to console themselves that neither US President Barack Obama, nor his Republican opponent Mitt Romney, will be keen to raise the subject in the lead-up to the US presidential election.
In an interview on CNBC this week, Weill, dropped a bomb-shell, arguing that it was now time to split risky investment banking from commercial banking. "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”, he told his stunned interviewers.
The split, he argued would clear the way for a "creative investment banking system”, which would again attract talented young people, capable of coming up with new financial innovations, and in which it would be possible to make mistakes without jeopardising depositors and the taxpayers.
Critics were quick to accuse Weill of hypocrisy. After all, at his time as boss, Weill drove through a series of audacious acquisitions that forged the modern-day banking giant Citigroup. Weill, more than any other banker, is credited with bringing down Glass-Steagall – the Depression era law that prevented commercial banks moving into riskier activities such as investment banking and stockbroking.
In Wednesday’s interview, Weill justified his previous actions, arguing the model of giant financial conglomerates was right for its time, but that the world had changed following the collapse of the US housing bubble. "So I don’t think it’s right anymore”.
Weill’s comments come at a sensitive time for banks. Many fear that a fresh round of global financial turbulence sparked by the European debt crisis will again result in taxpayers being forced to bail out the giant banks, as they did in the 2008 crisis when the US government put trillions of dollars of taxpayer money at risk recapitalising banks and providing guarantees. Indeed, they point out that the risks posed by the "too big to fails’ are now much greater as many of the largest financial institutions took advantage of the 2008 crisis to gobble up their stricken competitors.
What’s more the reputations of the big global banks have been further battered by recent scandals. Authorities in the US and UK authorities are to investigate a number of global banks to determine whether they were also involved in manipulating a key interest rate, Libor. The Libor-rigging scandal has already claimed the scalps of Barclays boss, Bob Diamond, and its chairman, Marcus Agius, and the bank has agreed to pay a £290 million ($US453 million) fine – the largest ever in the City of London. And the reputation of JP Morgan Chase was not enhanced after the bank was forced to confess that one of its traders – known as the ‘London Whale’ – managed to rack up losses of $US5.8 billion.
Still, bankers can cheer themselves up with the idea that US politicians appear to have little enthusiasm for breaking up the "too big to fails”. The Obama administration has responded to the financial crisis with the Dodd-Frank bill – an attempt to protect US taxpayers by preventing banks from taking gigantic risks.
And bankers are expecting Mitt Romney, the US Republican presidential candidate, to show even less appetite for carving up the banks. After all, according to the Guardian newspaper, Barclays executives have donated more than $1 million to Romney’s presidential campaign. And overnight, the executives were due to hand over yet more money to attend an exclusive fundraising dinner in London’s Mayfair, where tickets cost between $50,000 and $75,000.
In an ironic twist, the dinner was due to be co-hosted by Barclays former boss, Bob Diamond, but he was forced to pull out after losing his job in the wake of the Libor rate-rigging scandal.
As the Guardian notes, "London’s role in global finance has made it a key fundraising target in presidential elections. Obama, who is trailing Romney in the race for cash, held a similar fundraising party in the capital before the 2008 election.”