A Big Banker’s Belated Change of Heart

Jeff Madrick

Last week, in a CNBC interviewSanford I. Weill, the former chairman of Citigroup, said that America should separate investment banking from commercial banking. This separation, of course, was the prime purpose of the Glass-Steagall Act of 1933, a piece of legislation that Mr. Weill and other bankers had successfully watered down, with Alan Greenspan’s support, before Mr. Weill helped engineer its official demise in 1999. Now, Mr. Weill, the creator of what was once the largest financial conglomerate in the world, suggests that Citigroup and others should be broken up. Banks can no longer “be too big to fail,” he told CNBC.

But what was most eye-catching was Mr. Weill’s claim that the conglomerate model “was right for that time.” Nothing could be further from the truth.

Mr. Weill’s original business concept — the justification of financial conglomeration — was to provide one-stop shopping to any and all customers. This could now include clients for investment banking, stock research, brokerage and insurance. Then, with the 1998 merger of his Travelers Group with Citicorp, it could include savers, business borrowers and credit card users, too. But few, even among his own executives, ever believed the strategy would work.

Rather, conglomeration bred conflicts of interest in Mr. Weill’s firms, and others — the very conflicts that the original Glass-Steagall Act was designed to prevent. This inevitably led to investment in and promotion of risky, poorly run and, in some cases, deceitful companies that brought us the high-technology and telecommunications bubble of the late 1990s.

Indeed, Mr. Weill’s Citigroup was a primary underwriter of and one of the two largest lenders to the oil and futures trading firm Enron, whose accounting charade resulted in what was in 2001 the biggest bankruptcy of its time. Citigroup was a major underwriter for the telecommunications giants Global Crossing and WorldCom, which would later go bankrupt as a result of flagrant accounting deceptions. There were many other, if less visible, debacles.

At the heart of these fiascoes was the distortion of investment analysis into a sales pitch. Citigroup not only lent to Enron, WorldCom and Global Crossing and raised money for them, its analysts also aggressively promoted these companies to individual investors and pension funds. This was the bread and butter of Mr. Weill’s “cross-selling” approach.

Traditionally, investment analysis on Wall Street had been fairly well trusted as an independent opinion on which investors could rely. But there was a shift during the speculative boom of the 1990s, when analysts were directly compensated by their firms for promoting the sale of shares and the purchase of bonds for investment banking and loan clients.

This happened across Wall Street, not just at Citigroup. As one well-known analyst, Ronald Glantz, told Congress in 2001, “Now the job of analysts is to bring in investment banking clients, not provide good investment advice.” In the late 1990s, according to the former Harvard Business School professor D. Quinn Mills, only 1 percent of analysts’ recommendations were to sell a stock.

Jack Grubman, Mr. Weill’s star telecommunications analyst, became the poster child for promotional investment advice, earning up to $20 million a year. His most glaring error was to keep recommending that investors purchase shares of Global Crossing and WorldCom, almost until the moment they went bankrupt. Telecommunications investment banking fees made a fortune for Mr. Weill’s company. In 1998, Goldman Sachs tried to lure Mr. Grubman, by then a money machine, to its firm. When the bubble burst, Money magazine at last wondered whether Mr. Grubman was “the worst analyst ever.”

Mr. Weill had defended Mr. Grubman strongly, telling Business Week that “Jack probably knows more about the business than anybody I’ve ever met.” In fact, Mr. Weill was proud of the so-called synergy between investment banking and commercial banking that he is now seeking to limit. He told two of his biographers that it was the major advantage of his one-stop strategy. “The one you read about, which has worked out really well, is the connectivity between our Citibank commercial banking business and the corporate investment bank,” he said, referring to Citigroup’s subsidiary, Salomon Brothers.

The hole the financial collapse of 2000 and 2001 left in the economy was soon filled by the housing bubble. John C. Bogle, founder of Vanguard Funds, figures trillions of dollars were lost by the American public. To stimulate the recessionary economy, Mr. Greenspan, the Federal Reserve chairman, drove interest rates very low, and stoked the fires of the mortgage market. And Citigroup, where Mr. Weill remained chairman until 2006, was at the center of the mortgage excesses.

Observers who have been arguing that banks should be broken up shouldn’t especially cheer Mr. Weill’s conversion to their views. Mr. Weill no longer has anything to lose. And he hasn’t come to terms with the damage the financial giants did on his watch, which would have been a true test of his sincerity. Indeed, if he were still running Citigroup, he would almost certainly be singing a different tune.

This article was originally published by the New York Times. Copyright New York Times.

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