Father of the Too Big To Fail Bank now says “break 'em up”

Sandy Weill picture

Color us shocked.

The father of the Too Big To Fail Bank now says they should all be broken up.

A bit of history: The Glass-Steagall Act was enacted in 1932 as a response to the Great Depression.

It prevented commercial banks -- those that hold government-insured deposits from folks like you and me -- from making risky, speculative investments.

It also forbid commercial bankers from owing riskier types of financial businesses, such as investment banks, stock brokerages and insurance companies.

The law, though, was more or less repealed in 1999. Banks don't need regulation! Look how good we've done so far!

The man who led the charge was Sanford “Sandy” Weill, a rapacious New York wheeler-dealer who had merged The Travelers, one of the nation’s largest insurers, into Salomon Brothers, one of its biggest investment banks, and hankered to add one of the nation’s biggest commercial banks to his empire.

When his $76-billion merger with Citicorp, the parent company of Citibank, was completed in 1998, it looked like a pretty clear violation of Glass-Steagall.

But commercial banks had been lobbying Congress to deregulate the industry for years, and Weill recruited former President Gerald Ford and former Treasury Secretary Robert Rubin (under Bill Clinton) to move the effort along.

With bipartisan firepower like that, Glass-Steagall was dismantled less than a year later, and Weill got to keep Citigroup -- the first Too Big To Fail Bank.

Of course, we know what happened next.

The TBTF Banks took lots of risks. Those risks blew up. The global banking industry nearly collapsed. And the federal government had to step in to save them because they were, after all, Too Big To Fail.

Weill was pushed out of Citigroup almost a decade ago, and I really hadn’t thought much about him until he popped up on CNBC’s “Squawk Box” this morning and dropped the following bomb:

“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, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail."

This from a guy who, according to a 2010 New York Times piece, had a portrait of himself in his office, done in wood, with the words "Shatterer of Glass-Steagall" etched on it.

His remarks sent financial columnists and television commentators on a frantic hunt for the perfect metaphor to capture and explain what a momentous reversal this was.

My personal favorite was from Kevin Roose on New York Magazine's Daily Intel blog: "In political terms, it would be akin to Rick Santorum announcing he was becoming a GLAAD spokesman."

(GLAAD is the Gay & Lesbian Alliance Against Defamation.)

So here’s something I never thought I’d say: I completely agree with Sandy Weill.

He’s joining a growing number of thoughtful economists and financial professionals who know that our economic system is in grave danger as long as these TBTF Banks are around.

I can only hope Weill will be as effective in restoring Glass-Steagall (or something like it) as he was in destroying it.

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