Monday 22 January 2018

Weill's U-turn is no shock

It may be a surprise that the original boss of big banks is now encouraging their demise, but he certainly has his reasons

Former Citigroup boss Sandy Weill's call for the break-up of the big banks has further ramped up the pressure on the giant institutions which many hold responsible for the global economic crisis.

As U-turns go, it might not have been quite up there with Saint Paul's conversion on the road to Damascus but it certainly came close. Sandy Weill, the man who invented the modern "financial supermarket", has now decided that such behemoths are no longer such a good idea.

Appearing on CNBC's 'Squawk Box' programme on Wednesday, Mr Weill clearly took his interviewers completely by surprise when he stated that: "I think that 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 taxpayer dollars, that's not going to be too-big-to-fail".

With the global economic slump that started with the August 2007 credit crunch now about to enter its sixth year and the Barclays Libor-rigging scandal and the huge trading losses at JP Morgan demonstrating that at least some of the large banks have yet to mend their ways, the impact of Mr Weill's words was seismic.

It was, in the opinion of one analyst, "the sentence that changed everything".

To understand the significance of Mr Weill's comments, one needs to look back at his near 60-year career in financial services, during which he presided over a series of deals that created Citigroup, at one stage the largest financial institution in the world.

The son of Polish-Jewish immigrants, Mr Weill was born in Brooklyn in 1933. He graduated from Cornell University with a degree in government in 1955 and spent the next five years working in a number of junior positions at Wall Street investment bank Bear Stearns.

His big break came in the 1960s when a neighbour, Arthur Carter, persuaded him to join a newly-established independent brokerage. Over the next two decades under Mr Weill's leadership the brokerage consummated over a dozen deals, eventually becoming Shearson Loeb Rhoades in 1979, then the second-biggest brokerage on Wall Street after Merrill Lynch.

In 1981 Mr Weill sold Shearson to American Express for a reputed $930m. He became president of American Express but quickly fell out with its autocratic boss Jim Robinson and quit in 1985. At the age of 52, Mr Weill was out of a job for the first time in his life.

However, with his share of the Shearson sale proceeds burning a hole in his pocket he wasn't idle for long. In 1986 along with his young protégé Jamie Dimon, whose father and grandfather had both been brokers with Shearson, Mr Weill purchased Commercial Credit, a consumer finance company.

Repeating what he had done with Shearson, Mr Weill embarked on a series of deals. In 1993 he reacquired Shearson from American Express for $1.2bn and insurance company Travelers Corp for $4bn, in 1996 he paid a further $4bn for the property and casualty operations of insurer Aetna and in 1997 he purchased Salomon Brothers, then Wall Street's premier investment bank for $9bn.

Then in 1998 came the big one when Travelers Corp, as Mr Weill's company was by then named, agreed a $76bn all-stock merger with Citibank, at the time the largest bank in the United States.

The concept behind the merger was that Travelers would market its insurance and investment products to Citi's retail customers while Citi would be able to sell its banking products to Travelers investment and insurance customers.

Although structured as a "merger" with Mr Weill and John Reed, who had been Citi chairman before the deal, serving as joint CEOs it quickly became apparent that some were more equal than others under the new regime.

By January 2000, Mr Reed had been forced out leaving Mr Weill in total control of Citigroup, as the company was then known.

Also gone by this stage was Mr Dimon. Explanations of the reasons for his departure differ with the Weill camp pointing to a "shoving match" between Mr Dimon and a fellow-Travelers executive Deryck Maughan at a retreat for top company brass in October 2008, while sources close to Mr Dimon claim that his relationship with his one-time mentor never recovered after he refused to promote Mr Weill's daughter Jessica Bibliowicz the previous year.

Whatever the truth of the matter, Mr Weill fired Mr Dimon soon after the contretemps with Mr Maughan, fuelling an epic grudge match that shows no sign of abating after almost 14 years. Mr Dimon, in what looks suspiciously like a conscious imitation of Mr Weill, then joined Chicago-based Bank One in 2000, masterminding a series of deals which culminated in a merger with the blue-blooded JP Morgan in 2004.

Mr Dimon took over as JP Morgan boss in 2005 and following the 2007-8 financial crisis, which laid Citigroup low, Mr Dimon's bank toppled it from its perch. By then, Mr Weill had quit Citigroup, stepping down as chairman in 2003 and as chief executive in 2006. But, according to market gossip, the fact that his former protégé and now bitter enemy Mr Dimon had supplanted him as America's best-known and respected banker continued to rankle.

Now it's payback time. After seemingly dodging all of the bullets in 2007-8, JP Morgan has been hit by huge trading losses, $5.8bn at the last count and still rising. Suddenly Mr Dimon, who had been Wall Street's darling, is starting to look more than a little vulnerable.

One doesn't have to be a conspiracy theorist to find the timing of Mr Weill's Damascene conversion intriguing. The fact that he was filmed with the fragrant Jessica for one of the segments of his 'Squawk Box' appearance has not gone unnoticed. Honestly you just couldn't make this stuff up.

Following the 1929 Wall Street Crash and the subsequent Great Depression the Roosevelt administration passed the Glass Steagall Act which forced the banks to split their commercial banking, i.e. deposits and loans, activities from their investment banking operations, ie, so-called casino banking.

Despite repeated attempts by the banking industry to have it scrapped Glass-Steagall proved remarkably durable and was only finally repealed in 1999 to facilitate the Citi-Travelers merger, with Mr Weill leading the campaign to change the law.

Now Mr Weill has performed what might be charitably described as a volte face. But, hey, who's worried about being accused of hypocrisy if you can kick your bitterest enemy when he's down!

In reality, Mr Weill's motives are almost certainly more complex than mere revenge. A wily old fox with almost six decades of experience behind him, he has a well-developed sense for detecting which way the financial wind is blowing.

After the excesses of the Noughties, bankers are no longer flavour of the month. Big is no longer beautiful. The future of banking will almost certainly be one of smaller, more tightly-regulated institutions.

This in turn will force the existing big banks to shed many of their operations. Who will buy these divested operations, many of which will have to be sold off cheaply? Is it possible that Mr Weill, who will turn 80 next March, feels that he still has one big deal left in him?

Irish Independent

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