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."
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.