In a stunning reversal, a former big bank CEO who crusaded for policies that helped create the so-called "too-big-to-fail" banks now says we need to break up the banks.
"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, and have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail," former Citigroup Chairman and CEO Sanford "Sandy" Weill told CNBC on Wednesday morning.
It's a shocking statement coming from Weill, who was responsible for turning Citi into one of the largest banks in the world. During his tenure, he bought up one financial institution after another and orchestrated the merger of Travelers Group and Citibank in 1998--at the time, the largest merger in history. He retired as CEO of Citigroup in 2003 and stepped down as chairman in 2006.
A "stunning reversal" is absolutely "stunning" coming from a man that created one of the first "Too Big To Fail" banks in our country.
However, history does repeat itself and as grown men grow older, their views and outlooks begin to come back to reality. As one gets older, the need for greed reduces -especially for some who have all the wealth they will ever need or want.
Back in the late 1960's, Mergers and Acquisitions (M & A) were the business model of the day. It was a time where companies acquired other companies and became known as "conglomerates" - companies who owned many other companies especially in non related fields. A prime example of a conglomerate back then was a company called Gulf + Western - originally a company called Michigan Plating and Stamping - from which its owner began his comglomerate. Best known of all acquisitions by G+W was Paramount Pictures. For those of you who can remember, underneath the words Paramount Pictures in every movie were the words - " A Gulf + Western Company". A complete history of the company and its many acquisitions from Wikipedia...click here.
Then again in the early 1980's, Mergers and Acquisitions again became the business rage of the day. This time, much of it was done by a concept known as "leveraged buyouts". A business model coming back into popularity today whereby a company was purchased (acquired by another) using that companies assets to purchase itself. Or, where the company being acquired was worth more by selling off its components thereby creating the cash to complete the purchase.
During this period - which I call the original period of "Too Big To Fail" - many of our venerable and well known companies participated in this game. Companies such as that venerable paint company Sherwin Williams who acquired among others a non related business Drug Fair, a national retail drug store company.
Others in the game at the time was a company still very much alive and well today - Kohlberg, Kravits and Roberts (KKR) - leveraged buyout experts whose largest and most popular acquisition was RJR Nabisco. A conglomeration of companies comprised of aluminum, tobacco and food.
Now as history has shown us, bigger is not better! What many of these companies began to learn is that owning many other companies became a management nightmare. Many found it very difficult to operate in areas they had no expertise in and business they thought would flourish under one "umbrella" began to decline.
After the big push for M & A the next business cycle became the M & A divestiture. These large conglomerates as those created in the 60's began to divest themselves of all "non core" companies. The great sell off of the 1990's began. These companies realized that they needed to focus on their "core" business - the business that they were in business for and knew well. You can compare this to a butcher becoming a surgeon or banker becoming a Realtor.
As we have watched the banking industry consolidate through Mergers & Acquisitions to become larger and as we have watched Commercial Banks become Investment Banks and Investment Banks become Commercial Banks we are seeing what those back in the 60's and 80's saw. Difficult management of all components, reduced profits and non consumer friendly institutions on all levels. What I have personally experienced in these now Too Big To Fail conglomerates is a drastic decline in customer service - a very non consumer friendly environment with attitudes from management as big as their institutions who don't give a dam about the consumer anymore. Dictating their business by size alone with no consumer (customer) consideration, no customer relations morality or no business ethics whatsoever as they feel they have the control and ability to do what they want, how they want as even our government regulators are controlled by them..
But do not despair my friends, as people like Sandy Weill are coming forward to say this Too Big To Fail stuff is "not working" and needs to be broken up, we will see an eventual break up of these conglomerates because as history has proven, they do not work long term. There are others who see the reality of the banks "going back to their core business models" such as Sheila Bair.
Sheilla Bair, former head of FDIC, also has been a long time proponent of breaking up these Too Big To Fail institutions. She did so while active as FDIC chairperson and still does so today.
Eventually, I will predict, the banks will be broken up. Glass - Steagall made sense back in 1933 and makes even more sense today in the 21st century. There can be no greater evidence of Too Big To Fail does not work then the massive global financial meltdown and crisis that occurred just a few short years ago. History does repeat itself. Things that have not worked in the past do not work in the present and the corrections back to sanity will eventually come.