Former Citigroup CEO Says Banks Shouldn't Mix With Wall Street

A former CEO of Citigroup says there should be "some kind of separation" between commercial banking and investment activities, joining a growing list of financial luminaries advocating for the end of giant banks commonly referred to as "too big to fail."

John S. Reed, 70, served as chairman and CEO of Citicorp for 14 years from 1984 to 1998. After the company's 1998 merger with Travelers Group, Reed served as chairman and co-CEO for the next two years. He was forced out by the other co-CEO, Sanford I. Weill.

In a letter to the editor of the New York Times published Friday, Reed responds to a recent story detailing how Paul A. Volcker, the former Federal Reserve chairman who now heads President Obama's Economic Recovery Advisory Board, has largely been relegated to the sidelines as he embarks on what the Times refers to as a "quixotic journey" to "roll back the nation's commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities."

Reed writes:

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

The era to which the Times refers to ended in 1999 after Congress revoked the 1933 Glass-Steagall Act, the Great Depression-era law that banned commercial banks from underwriting stocks and bonds. The Senate voted 90-8 in favor of repeal. Though Citigroup was formed before the law was officially revoked, the company had the Federal Reserve and the Clinton administration's blessing to go ahead with the merger.

Reed has long been critical of the marriage of traditional commercial lending with investment operations, according to published reports.

Last year the Washington Post referred to him as "deeply skeptical of Wall Street financial engineering and committed to consumer banking and sound commercial underwriting."

In a 2003 profile, the New York Times said Reed was a "big name in corporate America who during a long career in commercial banking kept his distance from stock exchanges and brokerage houses -- and any of the scandals associated with that world."

Reed and Volcker are joined by Nobel laureate economist Joseph E. Stiglitz, a professor at Columbia University, in calling for at least a partial return of Glass-Steagall. What would that mean?

Per the Times:

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It's a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Reed could not be immediately reached for comment.

Comments

[ex republican]

It is beginning to look like President Obama and his team are going to do what the Republicans never could have done on its own. Make himself a one term President.

As much as I believe in universal healthcare, having lived in 3 different countries that have it, the financial system is a much bigger issue. It really isn't that complicated Mr President. Restore the New Deal protections separating banks, investment houses and insurance companies. Remove everyone from government that ever had a role at Goldman Sachs. Develop clear, simple, easily enforced regulations, and enforce them. Outlaw derivatives and naked short selling. Derivatives have no intrinsic value. Just trade the underlying assets.

And by the way, he's letting us down on healthcare too.

Mr President, these things won't drive most us who voted for you back the Republicans on election day. They will just cause us to stay home, which is much the same thing.

[mikekc]

The way things work in Congress now, especially the Senate, is if they re-instate Glass-Steagal it would be an "updated" version with thousands of pages written by lobbyists that would achieve the opposite of the result intended. It would claim to prevent the merging of investment and traditional banking, yet would provide new ways to structure such entities and to increse the flow of Federal Reserve and bailout money. The quid pro quo of course is that the legislators who would shepard the bill into law would receive massive golden parachutes when hired by the firms that would beneift at the conclusion of their "government service". Until our government is fixed it hardly matters what major reforms they pass as they are presently incapable of anything but preservation of the status quo and the quid pro quo of personal wealth in exchange.

[SimJack]

Well, there goes my inspirational integrative busing plan. Like Mensa, the 160's don't share with the 140's.

[tiredlady]

Well I'll be dipped. Another banker with 20/20 hindsight. Which end of the scale was he on when Graham, Rubin, etc. were dismantling Glass-Steagall? Let's not talk about fixing this so it doesn't happen again, let's FIX IT.

[Haditup2here]

Re-installing the Glassman-Steagall Act is only the first step. They need to break up all financial entities where conflicts of interest exists. Cases in point include AIG and Merrill Lynch and their accounting scandal with Enron>

[jsarets]

At the very least, financial institutions should be required to keep separate balance sheets for deposit and investment liabilities and their corresponding assets. The deposit book would be regulated by the FDIC and the investment book would be regulated by the SEC, both of which should be made subordinate agencies of the U.S. Treasury.

In the event of insolvency, such institutions would be subject to bankruptcy proceedings on the investment book and public receivership of the deposit book.

In my view, the more fundamental reform required to facilitate the self-regulation of financial markets is a requirement to disclose asset holdings.

We should have the right to know the asset positions of financial institutions so that we can make informed decisions on to whom we entrust our savings, so that institutions can have insight into counterparty exposures, and so that fraud can be more readily identified.

Efficient market theory rests on a few assumptions, one of which is that all market participants have equal access to information. But this hasn't been remotely true, and in fact, one of the incentives for financial institutions to grow and integrate different kinds of business models is to gain access to more information than other participants.

The traditional market model prescribes that brokers facilitate anonymous transactions between traders. This gives brokerages a substantial advantage when also acting as traders. We can try to build walls to keep the right secrets, but it's more effective to eliminate the secrecy altogether.

[SMROHIO]

Bailing the banks out saved the status quo which most can see will continue the cycle of boom and bust [the booms are geting smaller and the busts are getting bigger].Real change wont happen imo. Without a devastating collapse.

[ibsteve2u]

Say what? Just when a couple of the Wall Street banks have "miraculously" not only survived, but become BIGGER? Big enough to blow enormous paper bubbles - globally - all by themselves? Even as they drain huge amounts of the cold, hard cash that theoretically underlies the bubbles out for themselves?

Geeze...Volcker and Reed are no fun at all.

[ImissBush]

really??

[BlueDog1]

Ya think.....­..........­..........­..........­..........­..

[DC]

DUH! Then why did Congress get rid of the Glass Steagall ACT!!!!

[lillibelle]

AlanGreenspan, an arch-proponent of AynRand's philosophy, which espoused the only moral social system was laissez-faire capitalism, systematically dismantled Glass-Stegall during his decades long tenure as Fed Chairman. Gramm was his most vocal cheerleader and Clinton much, to be sure, to his ever lasting regret, signed it into law.

Imagine equating social morality with laissez-faire capitalism.

[LHB58]

The Glass-Steagall Act did precisely what this individual suggests: it seperated investment banking from commercial banking. It was repealed in 1999 with the passage of the Gramm-Leach-Bliley Act, which passed with the hysterically enthusiastic support of then Treasury Secretary Robert Rubin and our old friend Larry Summers.

It seems that we'd have better luck changing the weather by complaining about it than getting rid of Larry Summers by complaining about him.

[Mikeeee]

Sadly what's going on is just the beginning and O isn't doing anything of consequence to stop train wreck that's coming.
He has the opportunity to really make a difference.

[Micki Pacific]

Turn the lights on in the back of the Fed Rez and toss the bansters out of the backroom casino.

And call Meriwhether into the office, make him set up his magic money machine next to Elizabeth Warren's desk in the back of the US Printer's Office.Maybe Mom can keep an eye on this hacker so he doesn't destablize the global economy completely this time around.

Don't forget to send Phil Gramm a thank you card each year when you send in you (and your kid's) taxes.

[bluejoni2525]

Phil Graham's handiwork and to think McCain wanted him for Treasury Sec. "just a nation of whiners" is that right Phil ???????????

[ohmetoo]

Oh and don't forget his wifey Wendy had a hand in this also, the undoing of America for profit.