The 'too big to fail banks' have lost the support of arguably their most fervent backer.
Former Citigroup chairman and chief executive officer Sandy Weill shocked the world Wednesday when he said "mistakes were made" and it is time to break up the same banks he helped create.
"What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that's not going to risk the taxpayer dollars, that's not too big to fail," Weill said on CNBC.
In the wake of the 2008 financial crisis, Weill is essentially proposing to reinstate the Glass-Steagall Act nearly 13 years after it was repealed -- an event Weill himself played an integral role.
"What I am suggesting that they be broken up so that the taxpayer will never be at risk so that the depositors won't be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading and that is subject to Volcker," Weill added.
Neil Barofsky, former special inspector general in charge of oversight of the Troubled Asset Relief Program (a.k.a. the Bank Bailout), joined The Daily Ticker to discuss Weill's dramatic change of heart.
"I welcome [Weill] on team break them up," Barofsky says. "I think this is a movement that is gathering momentum."
"Sure it is infuriating" that Weill has flip-flopped on too big to fail, says Barofsky conintues. "But look, I don't think we should be punishing him for recognizing that he was part of a problem that caused a tremendous amount of damage to our country and our economy."
Among others, Barofsky has been advocating for breaking up the big banks for some time, highlighting his New York Times Op-Ed on his last day as inspector general of TARP in March of 2011. In the piece entitled Where The Bailout Went Wrong, he writes:
"The bank bailout, more formally called the Troubled Asset Relief Program, failed to meet some of its most important goals.
From the perspective of the largest financial institutions, the glowing assessment is warranted: billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish. These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed "too big to fail."
Sandy Weill: Why the 180 Degree Turn?
Weill, who retired as CEO of Citigroup in 2003 and remained chairman until 2006, is considered the father of supermarket banking model that made them a one-stop shop for all your financial needs.
Therefore, his reversal carries weight and raises the question: Why the change?
For the good of America, it seems. And perhaps also for the sake of is legacy as he approaches 80 years of age.
"Our world hates bankers," Weill said on CNBC, adding that the U.S. financial industry has lost a great deal of talent to other industries as a result. "Let's have a creative investment banking system like we have always had, so that the financial industry can once again attract the best and the brightest like they are doing in Silicon Valley -- like they are doing in engineering."
Weill also says America has fallen behind the rest of the world when it comes to financial innovation and investments that lead to economic growth.
"When you see what people are doing in Latin America and the Middle East and Africa and Asia, it's really exciting," he says. "I want to see the United States be the leader, and I really believe in our country. And we are not going to be a leader if we keep on trashing our institutions."
For the sake of innovation and entrepreneurship, Weill agrees that people and companies should be able to make mistakes without being chided and demonized.
"We can't have a world where it is impossible to make a mistake," he says. "If you make a mistake, you are really a bad person, because we do that we aren't going to have a world where anything happens"
Too Big to Fail: How to Break Up the Banks
"We need to rethink our approach to large financial institutions" and really eradicate the idea of the implicit government guarantee for banks, says Barofsky who is also the author of the new book, "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street."
Weill's proposal to separate commercial banking from investment banking is one step in the right direction, he says, but there needs to be a more involved "multi-step process."
In addition to flipping the switch back on in terms of Glass-Steagall, Barofsky says the banks need caps and limits on liabilities as well as higher reserve requirements to dampen the adverse effects of bad bets, putting the losses on the banks and shareholders vs. the government and taxpayers.
"We need to get serious about this. Our country is going to have another bigger more devastating financial crisis if we don't do something to limit the power, the influence and the destructive power of these institutions and the perversion they have on the markets," he says. "This is going to have to be a grass roots thing that comes from the ground up from 'Occupy' on the left and the Tea Party on the right and from every where in between" because of how captured Washington is with the banks.
Barofsky hopes having Weill on "team break them up" will help move the discussion forward and give legitimacy to the argument for breaking up the banks which have grown too big to let fail.
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