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Last month, I posted on 2008's eight worst ideas. At the top of my list was deregulation. Robert Rubin, who spent a decade as a director of Citigroup (NYSE: C) and is now retiring, is partly responsible for one very important act of deregulation -- the repeal of Glass-Steagall which separated investment and commercial banking. (It was former Citi CEO Sandy Weill's 1998 merger of his Travelers with Citi that spurred Glass-Steagall's repeal in the 1999 passage of the Gramm-Leach-Bliley Act which allowed commercial and investment banks to own each other.)
And by bringing down that barrier -- established in the wake of the stock market manipulations of the 1920s enabled by commercial banks that made margin loans to trade stocks -- the U.S. helped usher in the current financial catastrophe. Now the government is gradually reimposing Glass-Steagall -- in effect, if not in law.
Rubin was well rewarded for his decade of "service" to Citi -- taking in $126 million and being paid as an employee while claiming to be a mere advisor. But for that measly sum, Rubin's reputation -- which was at its zenith following his tenure as Treasury Secretary in the 1990s -- is shredded. It probably didn't help that since he joined Citi's board in October 1999, its stock has fallen 82% -- destroying $164 billion in stock market value. Meanwhile, the empire that Weill ushered in -- based on the idea that people wanted to buy all their financial services from one provider -- is being dismantled.
As I posted, Weill's bad one-stop shopping idea has a decades-long history that coincided with the election of Ronald Reagan -- and his push for deregulation. It's a bad idea because people don't want to do business with one financial services provider because if that provider gets into trouble, then the consumer could lose much, if not all, of his or her money. Moreover, if the consumer had trouble paying back a loan, it could make his or her entire financial life much more difficult.
And Citi did not really believe in the idea because if it did, it would have made it easy for consumers with a bank account to buy insurance or trade stocks. If it really thought one-stop shopping was a good idea, Citi would have integrated its banking, brokerage, and insurance units to make it easy for its customers to one-stop shop. But Citi kept those different units' systems separate and did not pay the units' people to work together to get a bigger share of the customer's business. As a result, the one-stop shop concept failed in practice.
So the benefits of one-stop shopping were only apparent to investment bankers who got fees for doing all the mergers required to build Weill's empire. And now those mergers are reversing. That's because talks are underway for Citi to sell a majority interest in its Smith Barney brokerage to Morgan Stanley (NYSE: MS). For the right to brag about being the biggest brokerage -- with 20,000 financial advisors -- Morgan Stanley will pay $2.5 billion to bring itself up to 51% ownership of the brokerage business -- valuing Smith Barney at roughly $12 billion.
Citi would still have both investment and commercial banking. But shedding Smith Barney reflects the government's desire to reshape Citi in a way that will lower its risk to rest of the world. After shoveling $45 billion into Citi and agreeing to guarantee $269 billion of its illiquid mortgage-related assets, taxpayer control over Citi is taking the form of dismantling the empire that Sandy Weill built -- with the help of deregulation.
As I told MarketBeat, Rubin's departure marks the swinging of the pendulum back to where it was in the early 1930s -- protecting the world from Wall Street run amok. Since Ronald Reagan, we've seen that deregulation can make people at the top very wealthy in a short period of time. But with the financial crisis showing no sign of letting up, it's becoming obvious that the other 99% pay a huge price for enriching the top 1%.
And dismantling Citi is the beginning of the end of one very bad idea -- deregulation.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in Morgan Stanley securities.
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Reader Comments (Page 1 of 1)
1-10-2009 @ 9:36AM
Nick Carter said...
Sandy's understudy Jamie has done it the right way at Bank One and Chase. He pays his people on the retail end for selling deposit products, investments, and loans. Customers can easily walk into any branch office and purchase a CD, apply for a loan, and purchase a mutual fund all in the same day and all with the same person .Many other banks are following in their footsteps. Just because Citi didn't do things the way the customers wanted to doesn't mean that the entire banking industry was trying to trick everyone when they pushed for the repeal of Glass Steagal as the author indicates. It's time for people to stop taking advantage of the current crisis to push their agenda.
1-10-2009 @ 9:41AM
Bernie Castillo said...
Why is it no one goes to jail when the big boys commit a crime. Only the guy who steals your purse containing pennies goes to jail for a looonnng time...
This is Capitalism with a big "C".
1-10-2009 @ 9:49AM
alim said...
It isn't so much deregulation but speculation that led to the current crisis. Not the kind of speculation of buying stocks and bonds but futures and derivatives especially crude and currencies related contracts which created the wild swings in prices which in turn led to massive unsustainable inflationary prices since most things we use today comes from crude. The banks and brokerages were caught up by their "shorthairs" that unless they close out these contracts crude was going to keep going up and thereby kill the economy anyway. See the relation between lower crude and where we are and you get to understand this whole scenario which the banks do not want you to know. Banks and financial institutions should stop speculating and invest in longterm and sound enterprises and projects which create real jobs.
1-10-2009 @ 10:12AM
Harry said...
I agree that Robert Rubin was the architect of Citi's destruction. However, I find Mr. Cohan's article lacking in political objectivity and skewed to protect the liberal left from a majority of the blame. Abeit, there's plenty of blame to go around. Democratic Presidents in the last 50 years have signed into law the most damaging deregulation laws.
With this article, Ronald Reagan is named & blamed for deregulation. This without specifics are to what legislation he passed as proof and on what dates. Left unaddressed was Jimmy Carter's naively passsed legislations in the late 1970's, specifically the 1977 CRA Act, and his increase in FDIC Insurance legislation--increasing the FDIC insurance on individual accounts from $10,000 to $100,000, which led to the Keating 5 and other irresponsible bank lending--due to their 10X increased leverage--by the stroke of President Carter's pen.
Bill Clinton signed into law, with a Republican majority Congress, the Glass-Steagull 1998, and the Grahmn-Leach S Act in 1999. However, Clinton's name wasn't mentioned within this article. Why?
The Glass-Steagull Act, by a wide margin, is the most heinous legislation that has led mightily to the mess we have today. Coupled with GSE's such as Fannie & Freddie, you now have the twin towers of this financial meltdown.
However, I do believe you got it right at the core--Robert Rubin has legally destroyed Citi, stockholders, & American lives for personal gain. He will be remembered for greed.
Harry
1-10-2009 @ 11:02PM
Beltway Greg said...
Regulations don't by themselves cause fraud. People commit fraudulent acts. I don't care if Greenspan pushed interest rates to -3% and what any president did in regard to greasing the skids of capitalism. People who made loans to individuals who couldn't pay those loans and then securitized said loans and infected our financial system are the culprits. People who took out home loans to fund trips to Maui are idiots. People who have excess credit card debt are idiots. People who bought SUVs.... you get the point. Stop all of this moronic though well-intentioned, not to mention highly entertaining blame throwing and get back to demanding discipline from the American populace at-large. Of course, the entire war in Iraq is Gdub's fault and their ain't no legislating your way around that fellas. Oh yeah, I forgot about the War Powers Act.
BTW, Bob Rubin didn't do anything.
1-11-2009 @ 9:33AM
Gemchuzhina said...
Overall, Mr. Cohan, you are correct. Your inference that Ronald Reagan is the root of the problem is incorrect. Certain deregulation is - and was - an excellent move, and started an economic boom. It was liberals like Weill and Rubin, under Clinton's admnistration who pushed for repeal of Glass-Steagall; in fact, there is a news clip of Clinton saying it was a great day for America. They took out sensible regulation, and replaced it with stupid regulation like the Community Reinvestment Act, certainly the beginning of our mortgage crisis today.
2-28-2009 @ 7:15AM
Jan and Stu said...
Enjoyed reading your blog entry and all the comments. Glass-Steagall served us well for many years and Sandy Weill is a bigger culprit at Citi than he is given "credit" for.
On our own blog at http://booboisieonline.blogspot.com, we mention 5 regulations we think are in order to help correct the present situation.
Thanks for the opportunity to comment.