Former Citigroup Head Waxes Nostalgic For Regulation He Helped Kill

Retired head of Citigroup John Reed seems to have some misgivings about the repeal of the Glass-Steagall Act of 1932, which his company lobbied to kill in the first place.

In a New York Times letter-to-the-editor, Reed writes:

“Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

It’s a bit of an ironic epistle considering Glass-Steagall’s dissipation made possible the merger between Citicorp and Citibank with Travelers Group, combining commercial banking with investment banking and insurance, and facilitating the sub-prime bubble and eventual collapse.

To be fair, Reed was ousted in a boardroom coup before the really bad stuff started to happen, as he would have been an impediment to it, but he’s still invited the vampire into the house.

For more on Glass-Steagall’s role in ushering in the Great Recession, check out our post “Blame The Subprime Meltdown On The Repeal Of Glass-Steagall.”

Volcker’s Advice [NYT via The New RepublicStash]

Comments

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  1. hi says:

    +5

  2. pecan 3.14159265 says:

    I misread that to be “Glass Seagull” and I wondered, why would anyone want to kill a glass seagull?

  3. thesadtomato says:

    Love the Shattered Glass reference.

  4. Eyebrows McGee (now with double the baby!) says:

    Nice Buffy reference!

  5. Coelacanth says:

    Oops – sweeping changes to regulation (more or less) has unintented consequences. Shocking! I hope that more people would carefully consider the long-term consequences on policy changes prior to acting. Maybe it’s the lobbyists who’re espousing the brunt of the myopic views.

    Sad, because there really is so much work to be done.

    • Falcon5768 says:

      @Coelacanth: actually this is less sweeping changes, and more how deregulation is a BAD THING and when your society isnt a “free market” in the first place, deregulation only leads to bad things happening.

      • ARP says:

        @Falcon5768: I wouldn’t go that far. I think that you can counter balance regulation and deregulation. For example, you can up reserve requirements and require reserves for every account, policy, swap, stock, etc. a financial institution has and allow them to operate as they have.

        You can let them operate how they are, but state that you can’t be bigger than X in size, so that if they fail, they don’t drag the economy with them. The only issue there is that if all the banks take the same risks, you could have multiple small failures.

        • Amish Undercover says:

          @ARP: It is hard if not politically impossible to set some arbitrary maximum size. And what if a company right at the edge has a highly successful year and grows 10%? Should we then tell them to fire all the people they hired on?

          It seems smarter to charge banks FDIC rates that incorporate their actual risk. Big banks == big risk, which translates to substantially higher FDIC rates. This means higher costs for big institutions, which means banks cannot grow indefinitely since they would no longer be able to afford the insurance. We also need to take off the arbitrary cap on how much capital FDIC can have, currently set at 1.5% but they are supposed to try to keep their capital low at 1.25%.

          • cowboyesfan says:

            @statgrad:

            Banks grow by purchasing competitors. A law eliminating bonus payments for the CEO the buying institution or the purchased institution would put a stop to the creation of “too big” to fail institutions.

            • Amish Undercover says:

              @cowboyesfan: Eliminating bonus payments for CEOs is not a free market solution and also can be worked around (e.g. options). Setting FDIC insurance rates to charge big banks directly for their systematic risk is a free market solution and will reduce the size of the largest banks.

    • Inglix_the_Mad says:

      @Coelacanth: b-b-but the market?

  6. H3ion says:

    This is known as the Robert McNamara Syndrome, although fewer people died.

  7. AllanG54 says:

    I worked for Citicorp when Reed became chairman. His background is actually in engineering and he was the guy who got Citi’s ATMs up and running. The first bank to do that. For that he got promoted because people could get their dough 24 hours a day, and people flocked to the bank. But he also presided over their first meltdown back in the 80s when he had to get some sheik from Dubai to buy $454,000,000 worth of non voting, preferred stock to prop up the bank. So, he’s used to screwing up.

  8. MooseOfReason says:

    We’re better off without it:
    [mises.org]