Did the Repeal of Glass Steagall Cause the Financial Crisis?

Sandy Weill, former CEO of Citigroup caused a stir today by commenting that Glass Steagall should be reinstated.  Since he is the person who pioneered the integrated banking model, the comments are shocking.  The comments are puzzling too because even if one thinks that separating commercial and investment banks would create more stability in the long term, it’s not entirely clear that the financial crisis stemmed directly from the integration.

Empirically, not a single integrated bank failed in 2008/2009.  Lehman and Bear were not commercial banks, and Indymac and WaMu weren’t investment banks.  AIG, Fannie and Freddie were not banks of any sort.  In fact, Goldman and Morgan Stanley (along with some insurance companies) were saved by converting to bank holding companies so that they could access liquidity at the Federal Reserve.

The argument for a separation of commercial and investment banking activities perhaps stems from the belief that depositors (“main street”) need to be protected from the volatility of securities markets. However in today’s economy, only a tiny portion of household savings is held as deposits anyways, so the savings of main street are far from insulated from a collapse of an investment bank (even if it were separated from the commercial banking system).

Below is a list of bank failures in 2008.  Note that Lehman, Bear, AIG, Fannie and Freddie are not on the list.  In all, 447 banks have failed between 2008-2012.  The vast majority were community banks that were in “less risky” lending businesses.  The fact is that banking is risky business in any form.

2008 Bank Failures

Citi 2Q12 Conference Call Summary

Quotes of interest pulled from the C 2Q12 call:

  • On a macro level, we believe the euro zone overhang will continue. Our on the ground sense of the emerging markets leaves us more positive than we were a few months ago, and maybe even better than some market perceptions.
  • In the U.S. consumer demand and Basel loan demand remain low, as consumers continue to deleverage. And as Federal banks have lowered interest rates, the margin from lending has decreased, and it is expected rates will stay low for the near future.
  • Citigroup end-of-period loans grew 1% year-over-year to $655 billion as continued loan growth in Citicorp outpaced the wind-down of Citi Holdings, and deposits grew 6% to $914 billion.
  • Total Citicorp loans grew 10%, with consumer up 2% and corporate loans up 22%. Excluding FX, Citicorp loans grew 13% with consumer up 5%.
  • SWe ended the quarter with a $191 billion in Citi Holdings were roughly 10% of total Citigroup assets. The $18 billion reduction in the second quarter included roughly a $11 billion of sales approximately $6 billion of net runoff and pay-downs and $1 billion of net credit and net asset marks.
  • …Global Consumer Banking, overall credit quality remains good, with continued improvement in North America and stable credit in Asia and Latin America. 
  • Latin America, despite the noise this quarter from FX was the fastest growing of our regions in consumer….particularly in Mexico
  • Asia consumer revenue growth has slowed…retail investors in Asia have de-risked giving the same global macro concerns…specific country slowdowns, most notably in Korea where policy actions by the government have trimmed the availability of consumer credit in that market…
  • …some revenue headwinds for Asia, into the third and fourth quarters. 
  •  North America consumer benefited from another quarter of strong mortgage activity…however, in cards…[reflect] ongoing economic uncertainty and deleveraging
  • …do not infer from the situation of one LIBOR submitting bank that every bank is in the same or a similar position…
  • There are still an awful lot of foreclosed – or foreclosures and profits that had yet to hit the market. So I don’t look at this yet as being a robust housing situation…the early 90s were small potatoes compared to what we’re going through now