Back in April, I blogged about a Federal Reserve Bank of Dallas official who says the industry failed to address the “too big to fail (TBTF)” issue and that we should break up giant banks. I questioned then whether there ever would be a debate on the subject. After Sandy Weill’s comments yesterday, I am slightly more optimistic.
Weill is arguing now that a break-up of the big banks would bring back trust in the U.S. banking system and could bolster its standing in the global financial system. He also wants far greater transparency into banks and their dealings. His change of heart and mind reflects current conditions and not the world of a decade ago, he says.
The controversial, now former champion of mega-banks may be on to something from a financial standpoint as suggested by David Reilly in his “Heard on the Street” column yesterday in the Wall Street Journal. Essentially, Reilly points out that the valuations of key giants—Citi, Bank of America and JP Morgan—are not faring very well in the markets as smaller regional banks that are more focused have attained higher valuations. The big banks are also facing requirements for higher levels of capital, the Volcker rule and other regulations that could shrink their bottom lines. Given these conditions, he argues that it might be wise for the big boys to call it a day and split up before the government forces the issue.
Ultimately, Weill’s comments may reflect what many have been quietly contemplating for some time—that the party’s over, bigger did not prove to be better and it’s time to try something else. But we need more than signs and words from former major players.
If the big banks don’t break themselves apart, then the federal government has to seriously consider the next step. The US presidential candidates need to address this issue, Congress needs to debate it and we have to come to some agreement as TBTF affects everyone.
If nothing else, Weill’s stunning reversal got far more attention than the inspired analysis of Harvey Rosenblum, the executive vice president and director of research at the Dallas Federal Reserve, who put forth the same proposition in the 2011 annual report. If the industry really takes the matter seriously, Weill will have gone a long way toward rectifying a dangerous situation that he helped create.