Jared Bernstein: Weill’s warnings shouldn’t be ignored

Updated
By The Cycle Staff
Jared Bernstein
by Jared Bernstein

COMMENTARY

It’s one thing to hear people like me—outside analysts who think we know how to make the system work better—hold forth on financial reform. You can judge for yourself whether our arguments make sense. But when a guy like Sandy Weill, former Citigroup CEO and “the man who invented the financial supermarket,” calls for breaking up the big banks, hiving off investment banks from deposit banks, raising capital reserves, and more …well, no disrespect to myself, but you really ought to listen very carefully.

In an interview on CNBC Wednesday morning that’s already caused a media stir, Weill “suggested that breaking up the big banks is the only way to rebuild the financial industry’s reputation in the wake of recent scandals and missteps,” as CNBC put it.

“I want to see us be a leader, and what we’re doing now is not going to make us a leader,” he said.

Sounds more like Barney Frank than someone who aggressively pushed for much of the stuff he’s now saying doesn’t work.

Here are some of Weill’s major points:

  • We should separate commercial banks from investment banks.
  • We should never have gotten rid of Glass-Steagall, the 1933 law which originally established that separation.
  • Banks should operate with leverage ratios that are 12-15 times their capital on hand, ratios well above those that prevailed before the crash (Weill correctly noted that the crisis was created by way too much leveraging against inadequate capital reserves).
  • Nothing should be “off balance sheet.”
  • Hedged positions should be “marked to market,” implying deals that are now between counter-parties should instead clear exchanges daily so they can be transparently valued.
  • The banking system has become too concentrated, putting taxpayers and the broader economy at risk.

I suppose you could say now that Weill’s retired, it’s no big deal for him to make these claims. But I don’t see it that way. The chieftains of the banking industry are a tight-knit group, and for one to go rogue like this takes some courage. I read this as someone who actually knows how the system works, or doesn’t work, from the inside, looking back on how ideas he once championed have actually functioned in practice. And as someone who recognizes that our financial system should not be a bubble machine that flits from one scandal to the next as it enriches its top tier at the expense of everyone else.

We are in the midst of a national debate where amnesia about what happened in financial markets a few years ago is sinking in. Mitt Romney is running on repeal of Dodd/Frank, the major financial reform legislation to come out of the crisis. He wants to replace it with…well, that’s to come later. Maybe.

We ignore the warnings of a former insider like Weill at our peril.

 

Jared Bernstein served from 2009 to 2011 as chief economist to Vice President Joe Biden, and as a member of President Obama’s economic team. He is currently a Senior Fellow at the Center on Budget and Policy Priorities, and an msnbc contributor.

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Jared Bernstein: Weill's warnings shouldn't be ignored

Updated