Call for Break-Up of Big Banks
Through persistent lobbying, Weill was instrumental in squashing the Glass-Steagall Act which limited the amount of risk banks could take on. In a recent interview Weill noted that he is suggesting that banks be broken up to limit risk for the taxpayers and depositors, essentially admitting that the “too-big-to-fail” banking concept was ineffective and unfair, with Citigroup as a prime example of this.
Named after Senator Carter Glass of Virginia and Henry B. Steagall of Alabama, both Democrats, the Banking Act of 1933 established the US Federal Deposit Insurance Corporation (FDIC), while imposing banking reforms with the emphasis on controlling speculative investing. By the 1960s some resistance to the restrictions of the Glass-Steagall Act was experienced as federal banking regulators interpreted provisions of the Act as allowing commercial banks and affiliates to widen out their securities activities. Supported by President Clinton, the Gramm-Leach-Bliley Act (or Financial Services Modernization Act of 1999) repealed parts of the 1933 Act, removing barriers prohibiting a single institution from providing investment banking, commercial banking and insurance. The Citicorp/Travelers Group merger in 1988 bypassed the Glass-Steagall act with a temporary waiver granted by the Federal Reserve, adding weight to arguments that the Glass-Steagall Act was outdated and no longer relevant.
With the benefit of hindsight, commentators have named the Gramm-Leach-Bliley Act as a significant factor in the 2008 (and ongoing) financial crisis, noting that the repeal gave Wall Street investment bankers license to gamble with depositors’ money. Conversely it has been argued that activities linked to the financial crisis were not covered by the Glass-Steagall Act in the first place. It remains to be seen if investment banking activities will be separated from commercial banking, with the FDIC only insuring commercial banking.