Former Citi CEO John S. Reed: Mea Culpa

John S. Reed, who was CEO of Citicorp for 14 years before the 1998 merger with Travelers (TRV) and then co-CEO of Citigroup (C) with Sandy Weill until Reed's retirement in 2000, says he was wrong. A Bloomberg (here) article by Bob Ivry quotes Reed.

Lawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”

Reed has the same opinion that a number of others, including SA contributor Simon Johnson and this writer, have expressed repeatedly.

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”

Reed made a pile of money before he retired (documented in the Bloomberg article), and I expect he has a handsome retirement package. But he definitely has second thoughts about what he did to make that money. He may be criticized for what he did, but wouldn't it be nice if others who have created the financial monster would also at least apologize? Instead, most are in a state of denial. And a few are speaking from church pulpits to proclaim the righteousness of their mission in the eyes of God (discussed here).

What a spectrum of spectacle. If the meek shall inherit the earth it may be after the strong have plundered it. Or maybe not. Free enterprise may yet be reestablished in spite of the fact that we are not moving that way yet. It will take years to restructure to a financial system that has checks and balances resulting from competitive forces, where bad decisions can result in failure and wealth is accumulated through sustained economic contributions rather than quarterly and annual gambling with loaded dice. It will take years because we can not afford the shock of collapsing everything and starting over. We don't have enough people who know how to grow their own food, spin their own yarn, make their own clothes and scavenge for heating materials. Such activity would make for very fit survivors, but that would not be the best way to solve our national obesity problem.

Hat tip to Barry Ritholtz at The Big Picture (here).

Comments

[redbaron:]

Bringing back Glass-Speagall is certainly an idea that I would support. And the sooner the better. It is growing increasingly apparent that we would go right back and make the same mistakes again, without some barrier between the investment and banking sides. Why wait? Lets do it now. We know it was a helpful thing before, so there is no question on that end.

Nov 09 07:49 AM

[Formyx:]

Glass-Steagall would not have prevented the collapse. The collapse was due to dodgy mortgage lending, a commercial banking activity. Banks would have collapsed even if they did not provide any investment banking services.

It seems that what we need is ONE super regulator with extensive powers, covering banks, insurance companies and anything financial,

Nov 09 08:27 AM

[john s. gordon:]

yes reinstate glass steagall, with teeth, the sooner the better.
> jack

Nov 09 08:39 AM

[john s. gordon:]

mr. reed has mellowed & become more of a philosopher.
i would advocate among the wall st rat race a little more time out for philosophy.
what am i doing & why am i doing it & what are the consequences of what i am doing?
> jack

Nov 09 08:41 AM

[captainccs:]

Too big to fail is too big and needs to be made small enough to fail safely. If that is achieved by bringing back Glass-Steagall than, by all means, bring it back, with teeth!

Nov 09 09:03 AM

[Fund Insider:]

As a former Citi employee, during the days of Mr. Reed,
I agree with Formyx and not with my former boss :-)

The vast majority of banks in this country are NOT investment banks, and never violated the old GS laws. Over 100 have already been taken over by the FDIC in 2009. These same "harmless" banks, were the very ones that issued mortgages to deadbeats, and sold those mortgages to the investment banks, FNMA, FHLMC etc. Whole idea of GS was to protect commercial banks, but now we need protect from the commercial banks ! There needs to be some way to make banks accountable for the loans they issue, which GS never addressed at all. Make them hold 50% of the loans they underwrite min, and they can only sell off 50% to the securitization market. Then maybe they'll think about who they loan cash. Problem before was huge leverage with no accountability for the banks. When you can loans trillions, sell the loans and lend again, that is leverage without accountability for your actions.

Not very comforting that the people who started the chain reaction still can not understand what they did wrong nor how to prevent a repeat of the crisis.


On Nov 09 08:27 AM Formyx wrote:

> Glass-Steagall would not have prevented the collapse. The collapse
> was due to dodgy mortgage lending, a commercial banking activity.
> Banks would have collapsed even if they did not provide any investment
> banking services.
>
> It seems that what we need is ONE super regulator with extensive
> powers, covering banks, insurance companies and anything financial,

Nov 09 09:09 AM

[vahrada:]

"Those who cannot remember the past are condemned to repeat it".
George Santayana, The Life of Reason, Volume 1, 1905

Nov 09 10:08 AM

[Leftfield:]

I see comments above that mention we would have problems even if we had Glass Steagall. Yes, we would have had some dodgy mortgages, but not as many. Those were made to rush them to Wall St. securitization and 40x leverage. Regardless of credit. And, jumbo loans were allowed by FNM and FRE in '05, I believe, so the dodgiest housing debt from the most inflated housing markets could go to the taxpayers and continue the game longer, thanks Chris Dodd and Barney Frank.
So, pretend and extend made things ultimately worse and influenced many of those banks since to go under since the bad real economy is still on it's own because the bailouts have gone to government and Wall St. Separating trading desks from commercial activity was, and remains, necessary.
Thanks for a view of a positive future in a competitive, not loaded, economic environment, John. Sometimes it's hard to envision that outcome with all the extravagant mistakes continuing to be made.

Nov 09 10:41 AM

[HunterGVL:]

Yeah, John Reed is just a lovable old codger who sees that MAYBE it was wrong to fleece the entire United States of America by helping repeal the only regulation that kept the foxes out of the henhouse. MAYBE they were wrong???? What a crock of shit. MAYBE derivatives were wrong too? MAYBE giving Jumbo loans to waitresses at Dennys was a bad idea too. I am just so sick and tired of hearing these lame ass excuses that THEY didn't understand, that NO ONE could have seen this coming. John Reed is feeling guilty and his conscience is eating at him as he thinks about dying and going to hell. Tough Luck.....burn, baby, burn, you greedy slime.

Nov 09 12:49 PM

[Econ 101:]

Yes, Glass-Steagall. But you also need to have the CDOs properly classified as Insurance products, which Goldman and AIG had the SEC say they werent. The Community Reinvestment Act also needs to be scrapped and the Executives at FNM and FRE need to be prosecuted for the morally irresponsible political contributions (to Chris Dodd, Barney Frank, B H Obama and others).

Nov 09 05:28 PM

[Steven Hansen:]

as others have pointed out Glass-Steagall would not have shielded the banking industry from this crisis - but it would have gone a long way to minimize TARP.

i accept we need to have a bullet proof banking industry - and this means we do not allow them to trade non-banking products.

Nov 10 03:34 AM