Isn’t it something how a former Wall Street baron named as one of Time magazine’s “25 People to Blame for the Financial Crisis” suddenly becomes a paragon of wisdom in the eyes of the media elites as soon as he advocates something they favor?
That’s essentially what happened to former Citigroup CEO Sandy Weill, who championed repeal of the Depression-era Glass-Steagall banking restrictions in 1999, oversaw a firm that made bad mortgage bets in the following decade that almost caused the firm to implode, and now says he changed his mind and wants a restoration of the New Deal legislation separating commercial banking from investment banking and insurance.
Weill is being congratulated by politicos and pundits for at last seeing the “error” of his ways. An alternative explanation for his about-face is that he is fashionably blaming “deregulation” for his own gross errors in running Citi. Whatever the reason, Weill’s change of heart doesn’t change the facts: The mortgages Citi made were not at all enabled by Glass-Steagall’s repeal, but by the subsidies and guarantees of government entities such as Fannie Mae, Freddie Mac, and — in Citi’s case in particular — the Federal Housing Administration (FHA).
Weill pushed to end Glass-Steagall not so that Citi could make or securitize mortgage products — banks had long had that power — but so that Citi could branch into insurance. He lobbied for the Gramm-Leach-Bliley Act, signed by President Clinton in 1999; it repealed the bulk of Glass-Steagall, enabling Citi and its banking operation to merge with the Travelers Group and its insurance subsidiaries. Does anyone actually contend that Citi’s control of Travelers’ insurance operations somehow led to the financial meltdown a decade later? That would be a tough argument to make.
Indeed, this point would be especially difficult to argue for one simple reason: Shortly after the repeal of Glass-Steagall, Citi and Travelers broke up. Citigroup spun off Travelers Property and Casualty into a separate company in 2002, and it sold Travelers Life & Annuity to MetLife three years later.
The banking firm probably would have been better if it had used its new freedom from Glass-Steagall to hold on to Travelers. In June 2009, Travelers replaced its erstwhile parent Citigroup on the Dow Jones Industrial Average. Today, Travelers is 112 on the Fortune 500.
As I have written previously on NRO:
In going into what Glass-Steagall and its repeal actually did, it’s useful to explain what the law didn’t do. Its prohibition on banks having securities affiliates had nothing to do with mortgage securitization. Banks had been selling off their mortgages for decades before the law’s repeal. In fact, Fannie Mae was created in 1938 with the express purpose of buying mortgages from banks, so there would be more liquidity in the housing market.
And in fact, it was Citi’s making of government-backed mortgages, bought by Fannie and Freddie and insured by FHA, that caused Citi’s woes and fueled the financial crisis. In February of this year, Citi agreed to pay a $153 million to settle claims that it had defrauded the government in loans backed by the FHA.
According to Reuters, “Investigators said 9,636, or more than 30 percent, of nearly 30,000 HUD-insured [the FHA is under the Department of Housing and Urban Development] mortgage loans that CitiMortgage made or underwrote since 2004 have defaulted, costing the agency nearly $200 million in insurance claims.” Obama-appointed U.S. Attorney Preet Bharara in Manhattan, famous for his insider-trading prosecutions, said: “For far too long, lenders treated HUD’s insurance of their mortgages like they were playing with house money. In fact, they were playing with other people’s money and other people’s homes.”
Bharara is right, but the president who appointed him has done nothing to rein in the FHA or Fannie and Freddie, to restrict lenders’ and speculators’ opportunity to play with “other people’s money.” In fact, both the Bush and Obama administrations have vastly expanded FHA insurance for mortgages.
To make matters worse, in 2010, Obama and the Democratic-controlled Congress rammed through the 2,600-page Dodd-Frank Act filled with harmful mandates that had nothing to do with the crisis, such as price controls on what banks may charge retailers to process debit cards and the requirement that manufacturers disclose their use of “conflict minerals” from the Congo. These mandates have hurt Main Street (including in eastern Congo) more than Wall Street, and so would the coming imposition of the Dodd-Frank’s Volcker rule, known as “Glass-Steagall lite,” as well as full-scale reimposition of the New Deal law.
Thanks to Glass-Steagall’s repeal, big banks aren’t the only ones who can now offer investment and insurance services to their customers. In fact, these products are adding stability for community banks reeling from bad mortgages and stalled loan growth. Investment News has reported that “regional banks, still reeling from their real estate exposure, are finding relief — and a healthy measure of profitability — in their wealth management businesses.” Wealth management runs the gamut of financial services from deposits to investments and insurance, activities that would be prohibited if Glass-Steagall were to return.
Sandy Weill once had a plaque in his office that said Shatterer of Glass-Steagall. If Weill really wants the economy to recover from the mistakes of his former firm and from the government’s massive mortgage debacle, he should keep his plaque and shut his trap.
— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.