Sandy Weill’s “Mea Maxima Culpa”

Sandy Weill, the man who almost single-handedly did more to obliterate Glass-Steagall now admits that he made a most grievous mistake. Those watching him on CNBC on the morning of July 25, 2012 were treated to a rare peak inside a confessional booth as the architect of today’s Citigroup admitted his folly. He now realizes that what he did was wrong and needs to be reversed.

Weill now believes that banks need to return to pure banking, whereby they accept deposits and make loans. Brokerage firms need to return to executing trades on behalf of customers, positioning securities to facilitate those trades, and taking risk positions within the boundary of reasonable leverage ratios.

It is time to begin the process of dismantling these financial behemoths. Citibank, Bank of America, JP Morgan, Wells Fargo, and others can dispose of their nonbank enterprises by simply issuing shares in those nonbank entities to existing shareholders. At the same these financial shopping centers need to reduce or eliminate the use of derivatives that have cast a giant cloud over their financial statements. While the institutions adhere to the belief that their long and short derivative exposures should be can be netted out, the stock market strongly suggests that market participants favor focusing on gross exposures since the counterparties are of questionable financial strength.

Forgive me father for I have sins - as a commercial banker, I discovered a loophole in the law that allowed me to be the first person to establish a brokerage firm as an operating subsidiary of a bank holding company in 1979. My application, regrettably, provided a pathway for others to follow. The loophole allowed limited brokerage services; however, in the 1990s those powers expanded geometrically thanks to favorable legislation and rulings.

People who were not trained as commercial bankers became CEOs of the nation’s largest banks, and they proceeded to transform those entities into unmanageable financial organizations or financial supermarkets. Sandy Weill was the poster child for that era and when he retired he left a crippled organization as his legacy. If the banking industry had a Hall of Shame, he would be a leading candidate to be the first person installed. Too bad it took him so long to get religion and see the truth!

Citigroups Stress Test Blunder

Citigroups ability to transform the latest Fed stress test into a disaster is further evidence of the incompetence of its management. It adds weight to the following tale.

An extremely wealthy man had triplet sons – Jim, John and Joseph, who were born in that order. When they were born he promised his wife that the boys could have anything they wanted when they turned 21.

On their 21st birthday he and his wife invited the boys into the living room to honor his promise. Jim was first born and entitled to make the first choice. When asked what he wanted Jim said he had always liked professional football and wanted to own his favorite team, the New England Patriots. His father immediately called Robert Kraft and made an outrageous offer that Kraft accepted.

The second son, John, was then asked what he wanted. He said that he had always liked professional baseball and wanted to own his favorite team, which was the New York Yankees. His father immediately called Hal Steinbrenner and made an offer that was accepted.

The third son, Joseph, was then asked what he wanted. Joseph said that he had always liked the circus, particularly the clowns, and dreamed of one day owning his own circus. After thinking for a minute, the father called Richard Parsons and offered to buy Citigroup!