The Man Who Changed the Face of Banking

Sanford Weill, creator of the ‘financial supermarket,’ reflects on recent changes to the financial world.

Bloomberg

On the 46th floor of the GM building in New York City, a portrait of one of the most famous bankers of the 20th century hangs on the wall, painted in 2010. Etched in the wood next to the face of Sanford “Sandy” Weill are the words “The Shatterer of Glass-Steagall.”

Weill was the man who invented the “financial supermarket” – the financial behemoths that deal with every aspect of banking and finance, from retail to underwriting IPOs, advising in corporate deals to trading with their own money (proprietary trading). He made the creation of these mega-banks possible by pushing to repeal the Glass-Steagall Act, which separated commercial banking from investment and securities banking.

Ironically, this man who single-handedly changed the face of the banking world by creating the mold for the “Too Big To Fail” financial institutions was born in 1933 – the same year that the Glass-Steagall Act was legislated in the first place.

In our meeting in mid-June in Israel, Weill seems younger than his 82 years. He is thrilled about the cause of his visit – accepting an honorary doctorate from the Technion-Israel Institute of Technology. Weill received the honor for his record as a “visionary philanthropist in cultural and educational institutions in the United States and more recently, Israel; and in recognition of the active role you played in building and forging the Technion-Cornell partnership as an adviser and consultant,” as the Technion’s announcement specified.

In 2012 the Technion was awarded, in partnership with Cornell University, the contract to build a technology campus in New York City.

“It’s more than special; it’s an institution that I care about. I think it’s doing terrific things and in recent years it has gone global with its partnership with Cornell and New York City. And now the arrangement they have to build an engineering campus in China – I think it’s terrific.

“When I started out in college, I was taking engineering classes in 1951, and now in 2015 I finally got a diploma in engineering,” Weill beams.

Weill was the man who called Peretz Lavie, the Technion president, and suggested the partnership with Cornell. Lavie called David Skorton, Cornell’s president, whom Weill knew well, being one of the biggest donors to Cornell.

There’s a growing concern here in Israel about BDS, including attempts at an academic boycott in U.S. universities. Do you see that as a real concern, and if so, what can be done about it?

“There is one thing you can do about it,” Weill says, and pauses deliberately. “It’s an important issue. There are a lot of signs, whether it’s a boycott or whether it’s what the UN might do. I think one must be responsive to what people are saying around the world. And I’m sure you’ll wind up doing the right thing.”

So it’s a matter of a political solution in Israel, and not a matter of diplomacy or something like what Haim Saban and Sheldon Adelson are trying to do now?

“Raising money to fight this? Good luck. He’s a friend of mine, Saban. I think that all people should be responsive to the evolution of people’s thoughts. You have to keep your eyes and ears open to the changes, not to close your eyes.”

Early last decade Citigroup was considering retail operations in Israel, but it withdrew from that plan.

“I think it’s something that we thought about, but we felt that Israel had enough banks that were serving individuals, so we thought it was too competitive. We didn’t consider it a good option. But we were the first major foreign bank that established a branch in Israel.”

Does the fact that there are two major, strong banks which hold a big share of the market is a deterrent to a major international bank like Citi?

“I can’t speak for Citibank because I’m not there any more; I haven’t been there for a long time, but a bank better do something to make a profit; we do have banking operations in Israel where we have a lot of strength – investment banking and asset management. We can compete very profitably against local institutions. I read in the newspaper that Citigroup is trying to consolidate its consumer operations to fewer countries.”

How do you balance the need to protect consumers from concentration of power in sectors like banking and the recent gas discoveries in Israel, with the need to encourage business and enterprise?

“I think Israel has done a great job with development of new high-tech companies – probably more than any place except maybe the U.S. – and new ideas and companies are thriving. Now that I have a degree from the Technion I can say that it’s a much better area of opportunity than consumer banking. I really don’t know about the local economy and taxes.”

Weill, a billionaire and a renowned philanthropist, was born in Brooklyn during the Great Depression in the 1930s. He was the first child of Jewish Polish immigrants who built a dressmaking business. He graduated in government from Cornell in 1955, and went on to become a broker in Bear Stearns. In 1960 he formed Carter, Berlind, Potoma & Weill with partners, and spent the next decade making deals that turned the firm into the second largest brokerage in the U.S. In 1981, he sold the business, under the name Shearson Loeb Rhoades, to American Express for $930 million.

He began serving as AE’s president in 1983, and there he met Jamie Dimon, who later became JPMorgan Chase’s CEO – a bank that will, in time, overshadow any other U.S. bank.

Weill resigned from AE in 1985 and went on to buy a string of finance, investment and brokerage companies, including Salomon, parent of Salomon Brothers, as well as his old firm, Shearson.

In April 1998 Weill struck the deal that redefined finance and banking – and in some aspects, the global economy – when Travelers Group, which he had bought for $4 billion, announced a merger with Citicorp for $76 billion.

A huge cloud hung over the merger – according to Glass-Steagall, a bank was barred from underwriting insurance. So the merged company had two to five years to spin off the insurance business or pray that Glass-Steagall will be repealed.

Prior to announcing the deal, Weill and John Reed, Citi’s CEO, personally called three people: Treasury Secretary Robert Rubin, Federal Reserve Chairman Alan Greenspan and President Bill Clinton. The Fed approved the deal in September 1998.

Weill and Reed sent troops of lobbyists to Capitol Hill. And so it came to be, after 25 years and 12 failed attempts to repeal Glass-Steagall, that the act was revoked on October 22, 1999. A few days after that, Rubin, the former treasury secretary, accepted a high-paying position in Citi, offered by Weill.

Today, Weill claims that the U.S. banking sector after the 2008 crisis is much safer, less leveraged and better capitalized. The regulation reform might be too heavy-handed as negative reaction to the crisis, and is very expensive, according to Weill.

“Banks need transparency, and financial institutions should be transparent. This whole concept of off-balance sheet was a big mistake. If you do something, it should be on the balance sheet and that would take away a lot of the risk.

“Derivatives should all go through a clearing house, so they’d be marked-to-market every day according to the credit worthiness of the counterparty.”

In 2012 it was reported you support reinstating Glass-Steagall.

“I didn’t say that. Glass-Steagall had nothing to do with the issues that created the problem. Larry Summers, who was head of treasury [succeeding Rubin], agreed with Alan Greenspan how banks should be regulated from the point of view of the two institutions – one was political and the other was separated. Travelers, which was spun off, didn’t have any problems during the crisis because they didn’t do anything crazy with their investment portfolio.”

Weill was alluding, perhaps, to the mess at AIG, the biggest insurance company in the world, which was brought to the brink of bankruptcy after selling huge amounts of high-risk securities called CDS – insurance contracts against defaults on bonds. AIG was bailed out by the federal government.

Citigroup itself was at the brink of collapse in 2008, after years of financial alchemy which involved creating CDO – collateralized debt obligation – a type of bonds that pooled big “parcels” of mortgages. When the housing market collapsed, the CDO market fell with it.

Citi was a major player in the market, encouraged by CEO Charles Prince and his trusted advisor Robert Rubin. The former government official who had helped Citi remove Glass-Steagall from its way raised the bar on risk-taking. Many industry insiders claimed that Prince and Rubin played a major part in Citi’s failure. It was also said that Prince didn’t know CDO from a grocery list.

Within a few days after Lehman Brothers’ bankruptcy in September 2008, Citi disclosed losses of $65 billion and additional potential losses, only to be bailed out by the federal government.

In an interview to TheMarker in 2013, Sheila Bair, who during the crisis was the chairman of the FDIC (federal deposit insurance corp), the banks’ regulator, said: “with institutions like Citi, there should at least have been a serious discussion about taking them through some kind of bankruptcy process.”

In the aftermath of the crisis, not one executive in Wall Street was charged. What message does that send about accountability, from an administration that promised “change”?

“The banks and their shareholders were held accountable, because they paid billions and tens of billions of dollars [in fines]. I wasn’t working at the time; I gave up being CEO in 2003. They might have wanted to avoid a witch hunt, which wouldn’t have accomplished anything.”

You single-handedly changed the face of banking in the world. Looking back, would you have done anything differently?

“It is true that I was a game changer. I think it was for a lot of good. U.S. financial companies have offices around the world working with emerging countries, be them communist countries or democracies, teaching them how the capitalist system works – helping start stock exchanges all over the world, which helped raise money, create jobs. A billion people, maybe more, were moved from abject poverty to the middle class in their countries. We still have about 2.5 billion people in abject poverty today. What bothers me is are we going to have the financial system that can continue to grow and create opportunities for them.

“In the world that we live in today, those people who looked at the future and said, ‘we have no future’ will be willing to put a bomb on themselves and blow themselves up, and us with them. I think I’m very proud of what our company did in the period when I was the CEO.”