Friday, February 5, 2010

Making a monster

Back in 1998, two big corporations merged. Citibank joined Travelers Insurance Group in the biggest merger of financial institutions in US history. The merger was most likely illegal. After the disastrous crash of 1929 and the coming of the Great Depression, Congress enacted a law (Glass-Steagall) forbidding banks from entering into brokerage businesses. Travelers owned Salomon Smith Barney, an investment bank and brokerage firm. So the merger brought together financial interests that had been separated by law since 1933 when Glass-Steagall was enacted.

No matter. By 1999, Glass-Steagall was repealed, and the new Citigroup was safe to bungle the economy in innovative ways. An informative timeline of these and related events can be found here.

Yesterday, in testimony before the Senate Banking, Housing and Urban Affairs Committee, John Reed, who was CEO of Citibank at the time of the merger, came out in favor of reinstalling at least some of the divisions between banks and brokerages he and Sandy Weill (Travelers CEO) effectively ignored and eventually got overturned 11 years ago. It wasn't the first time Reed had made noises to that effect: last fall he wrote a brief letter to the NY Times on the topic. But Reed seems to be on something a tear this week. He granted an interview with the NY Daily News yesterday as well:

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “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.”