Wednesday, July 25, 2012 –
Sandy Weill, Glass-Steagall, and Banksters on the Wrong Side of History
-by Sinclair Noe
DOW + 58 = 12,676
SPX -0.42 = 1337
NAS – 8 = 2854
10 YR YLD unch = 1.41
OIL +.61 = 90.67
GOLD + 23.70 = 1605.80
SILV +.38 = 27.44
PLAT + 15.00 = 1406.00
One story today. In 1993 Sandy Weill acquired Shearson Lehman; in quick order he also bought up Travelers Corp and Aetna Life and Casualty and then Salomon Brothers. He began calling the conglomerate, Travelers Group. In April 1998, Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp. The new company, called Citigroup, combined a commercial bank holding company with an insurance company and investment banking; it was a big one stop shop that included Citibank, Travelers, Smith Barney, Primerica, Citifinancial, Shearson, Aetna, and Salomon. At the time, it was the largest merger in history and created a financial behemoth with operations in 100 countries. It was also illegal based upon the Glass-Steagall Act of 1933.
Let’s go back in time to explain Glass-Steagall. At the height of the Great Depression the Congress conducted hearings which showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public’s trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. The preferred list included: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into control of government.
J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JPMorgan had also not paid taxes. The revelation that the wealthiest American were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army, the World War 1 veterans looking for their pensions, only to be turned away at the point of a gun by active troops led by Patton and MacArthur.
The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.
The three evils were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks’ financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction.
The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. Glass-Steagall is actually the Bank Act of 1933, which also included allowing the Truth in Securities Act and the Securities Exchange Act, which created the SEC; and also the FDIC to insure bank clients’ deposits. The bankers had so thoroughly abused depositors’ confidence that insured accounts were the only way to lure depositors back to banks; even then, millions of Americans would never trust banks again.
The Bank Act of 1933 worked, all the way up until 1998 when Sandy Weill and John Reed illegally merged Citicorp and Travelers Group in direct violation of Glass-Steagall. So, they decided to change the law. They hired former President Gerald Ford and former Secretary of the Treasury Robert Rubin. Their lobbying efforts cost more than $300 million dollars and produced fast results. Senator Phil Gramm, who received almost $5 million in campaign donations, led the assault. Gramm would eventually become a high paid consultant for the Swiss bank, UBS. Treasury Secretary Robert Rubin, a former partner at Goldman Sachs and soon to be Director at Citigroup, also championed repeal of Glass-Steagall.
The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 , finally killed Glass-Steagall. The wall between commercial banks and investment banks was torn down. It did not take long for the financial behemoths to start making risky bets with depositors’ money.
The Commodity Futures Modernization Act of 2000 then provided the casino for the big banks to play; the act was written by lobbyists and co-sponsored by Phil Gramm and Richard Lugar. The Act was tacked onto thousands of pages of a budget bill in the final hours before a vote; it is doubtful any legislators read the complete Act before voting. The Act removed regulation on newfangled financial products called swaps and derivatives. According to Senator Gramm, the Act would “protect financial institutions from over-regulation” and “position our financial services industries to be world leaders into the new century.” What it did was to turn banks into a modern version of the bucket shops that caused the Panic of 1907. Banks were now allowed to place private bets, called derivatives, on underlying assets, such as commodities, securities, interest rates, or anything else they wanted to bet on. The bets were private and did not fall under the regulation of public exchanges. If the bets went bad, the banks could and would turn to the taxpayer for bailouts; and when the public grew weary of bailouts, the bankers used excess deposits, insured by the FDIC to place their bets.
The derivatives and swaps market has now grown to more than a quadrillion dollars. The GDP of the US is around $15 trillion; global GDP is about $55 trillion. To say that the banks are out of control is a huge understatement.
In 2009, John Reed, co-founder of Citigroup came to regret the repeal of Glass-Steagall and his role in bribing politicians for the repeal. Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”
Ten years after his treasonous deal, Reed tried to justify his unfettered greed; he said: “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.” Apparently Citigroup management must renounce citizenship as a requisite for employment; or is it just to take their severance pay?
The real catalyst for repeal of Glass-Steagall was Sandy Weill. Weill went on to run Citigroup; where he financed such frauds as Worldcomm and Enron. For years Weill has denied that repeal played any role in the 2008 financial crisis, even as the House of Sandy failed in 2008 and required bailouts.
Today, he appeared to change his mind. On CNBC this morning, Weill said: “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. I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,” and “We should have banks do something that is not going to risk the taxpayer’s dollars.”
Well, I hope the hypocrite burns in hell. He has done a terrible disservice to his country. We should not have listened to him in 1998. We should not listen to him now. It is unlikely his about face will have any impact. Still, it is an admission that the banking system is broken; an admission from one of the people who built that system. When Sandy Weill says the banks should be broken up, it’s hard to make a case for the status quo. Clearly, after you strip away the golden parachutes and the bribery; and in the patina of time, the apologists for the banksters will all be proven to be on the wrong side of history.