I had no idea, when I posted a piece about CEO’s who suddenly became concerned about abuses of CEO power after they had retired (“Penitent CEOs,” 7/22, on this website) that the group would be joined so soon by Sandy Weill, of all people. Weill was, of course, the supreme architect of the one-stop financial supermarket, the builder of the largest and most diversified bank holding company, and the leading opponent of Glass-Steagall during the 1980s and 1990s, when the debate on deregulation of the financial sector in the U.S. came to a head. Now, he has decided that the all-embracing financial services empire which he created wasn’t such a good idea after all.
It’s a little late, now that the integrated juggernauts, with their numberless interconnected financial positions, were able to paralyze the world’s financial system due to their heavy involvement with shuffled and re-shuffled speculative mortgage-backed securities. The world’s mania for one type of purely American, ill-conceived financial instrument, whomever’s fault it was in creating the bubble in the first place, managed to turn the popping of an investment bubble into a world-wide recession the end of whose effects are nowhere in sight. Meanwhile, Weill remains one of the richest and best known financiers in the world. As I quoted poet Sagoff’s sarcastic career summary of the latterly repentant ex-prostitute and adventuress, 70-year old Moll Flanders: “Love your sense of timing, Moll.”
However, better late than never, if it has a beneficial effect upon others, especially those now in Weill’s former position. Calls to separate trading and other risk-seeking activities from commercial banking, and to generally make the individual components smaller, so that the entities compete with one another, and that none of them are systemically important by themselves, seem eminently sensible, assuming that somehow we can get the genie back into the bottle. Weill certainly seems correct in his statement, aimed at otherwise apathetic institutional shareowners, that the disaggregated parts are almost certainly worth more than the wholes of ten mega-banks, especially when these are threatened by greatly increased capital requirements, a much heavier burden of intrusive regulation, and all sorts of limitations on their non-commercial banking activities anyway. But fanatical defenders of the status quo go on, including almost all of those currently in decision-making positions at the few surviving major financial institutions.
Do they ever learn? MF Global blew up without creating a ripple even in the current overstressed, euro-obsessed financial system, because it was neither very large, nor involved in the rest of the financial system. Fourteen years ago this summer, Long-Term Capital Management imploded, and despite fears at the time of contagion due to their enormous leverage, the disaster was contained with the aid of the Fed, and the economy sailed bravely on—into the dot-com bubble. Which, widespread as it was, only stopped economic expansion for two years, and this with the added assistance of 9/11 and the Enron/WorldCom/Tyco scandals. The market crash of 1987 turned out to be an epiphenomenon, whose effects were all erased within twelve months.
But that was before so many financial institutions had been rolled together into BANK, the systemically-essential all-important money-making machine (did anybody ever say that the partners of Lazard, of Salomon, of Morgan Stanley did not become rich? That Citibank’s Walter Wriston ended up in the poorhouse?) By contrast, when Lehman’s exposure to the debt markets raised questions about the solvency of Citicorp, Royal Bank, UBS, and so on in a cascade through the twenty or so major universal banks, the whole world’s credit markets seized up, and the Great Recession was on, and not only in the U.S. but almost everywhere.
The closest parallel in recent times to the Crash of 2008 – 09 is the Savings-and-Loan disaster of 1986 – 1989, when previously specialized financial institutions were allowed to get into activities intrinsically distinct from (and in maturity terms, incompatible with) their core business. It had enormously expensive, but ultimately controlled effects, although one of them may have been the relatively mild recession of 1990 – 91. By contrast, Countrywide Financial almost buried the Bank of America, First Franklin Financial brought down Merrill Lynch. And AIG would have buried Goldman Sachs had the government not stepped in. Nor would the disaster have stopped there.
But the would-be Napoleons of finance and industry just keep coming on. All too often, the human ego proves insatiable. This is why checks and balances—especially including concerned shareholders and directors who take their job seriously—will always be important. “Corporate governance scolds” are necessary because human nature involves certain unchanging weaknesses, and one of them is the pride that knows no limitations, the finite army whose general thinks it can conquer infinite spaces.