In the years since the financial upheaval of 2008, there has been a steady stream of converts to the idea that the largest and most powerful players in the U.S. financial system need to be broken down into smaller, more manageable entities. Seldom heard from, however, are those who have been at the helm of those big banks -- until very recently. In an interview with CNBC, Sanford Weill, former CEO of Citigroup (NYSE: C ) , has added his voice to the chorus of those advocating such a scenario.
A public back-pedaling
Weill’s suggestion was simple: Separate the commercial portion of banking from the investment sector, removing the risk from depositors and taxpayers when trades go wrong. Others have offered this view, of course, but it's surprising coming from Weill, who is well-known for being one of the most persistent voices calling for the repeal of Glass-Steagall back in the late 1990s.
Many respected financial experts have been voicing the opinion that big banks need to be divvied up for some time. Sheila Bair, former Chair of the FDIC, recently wrote in Fortune that banks like Citi, JP Morgan Chase (NYSE: JPM ) , and Bank of America (NYSE: BAC ) are simply too unwieldy to manage successfully. Simon Johnson, a onetime chief economist at the IMF, has been beating that drum for years, and James Bullard, the president of the St. Louis Federal Reserve Bank, has also come out in favor of downsizing the big guys, among others.
The demands for change have gotten louder since the JP Morgan trading debacle a couple of months ago, and the public airing of the Libor rate-setting scandal, featuring the aforementioned U.S. banks, as well as Britain’s Barclays and Swiss giant UBS.
Weill is not the only big banker to express concern over the troubles of the "too-big-to-fail" banks, either. Last month, Phil Purcell, the former CEO of Morgan Stanley (NYSE: MS ) , called on investors to use their power to pressure the biggest banks to separate their commercial and investment arms. More recently, Goldman Sachs’ (NYSE: GS ) Lloyd Blankfein expressed dismay at how the Libor scandal is further eroding the public’s trust in the banking system, noting that banks have never regained the level of confidence they enjoyed before the financial crisis.
Blankfein has a point. Two separate reports have noted that almost everyone has lost faith in the financial system, with the public’s overall trust level in national banks dropping to just 23%, and investors’ jangled nerves running up the cost of credit default insurance to levels 20 times where it stood mid-2007.
One big difference between the bankers’ position and that of other analysts is that the bank chiefs are more concerned with the profit levels of the banks, rather than the effect their shenanigans have on the economy as a whole. There is good reason for this concern, since 2012 hasn’t been a banner half-year for the big boys, with most reporting declining revenues and earnings.
Has this self-knowledge come too late for these big banks? Time will tell if the epiphany experienced by ex-big guys Weill and Purcell spreads to current bank CEOs. On the other hand, the mounting disgust and piling on of lawsuits regarding Libor may take the decision out of their hands. Heady times, indeed.
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