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.