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Bloom on the rules

In the span of two days in July, the proposition that American megabanks should be disassembled and disarmed advanced closer to reality with remarks by two influential figures. On July 25, former Citigroup CEO Sandy Weill stunned the "Bart Naylor" "Financial policy reform"banking world with comments that effectively repudiated his defining career accomplishment. Although less publicized, comments made by Federal Reserve Board Governor Sarah Bloom Raskin two days earlier may carry even more influence.

Sanford Weill built the largest American bank when he merged Travellers Group and its Salomon Brothers unit with Citibank 1998. That violated Glass Steagall, the law that prohibited firms from engaging in both commercial and investment banking. But after receiving a one-year reprieve from Federal Reserve Chairman Alan Greenspan, Weill helped engineer a law abolishing Glass Steagall altogether. A dozen years and a major global financial crash later, Weill recently told an interviewer: “What we should probably do is go and split up investment banking from [commercial] 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.”

With his statement, Weill effectively renounced his crowning career achievement. He implicitly attested to the unmanageable risk of megabanks. Whether Weill’s pirouette will prompt Congress to restore Glass Steagall remains unpredictable.  Advocates have certainly seized on his testimony.

Commenters theorize Weill may be protecting his legacy. Time Magazine named him one of 25 people responsible for the financial crash, owing to his creation of the Glass Steagall-busting megabank. With his new view, Weill joins numerous former megabank executives who call for radical reform, including bank break ups, such as: former Morgan Stanley CEO Philip Purcell; former Bank of America executive Sallie Krawcheck; former Citibank CEO John Reed; and former Merrill Lynch CEO David Komansky.

Less conspicuous, but perhaps more powerful, came a speech on July 23 by Sarah Bloom Raskin, one of seven governors of the Federal Reserve Board.  She faces an upcoming vote on the proposed regulations to implement the so-called Volcker Rule, a provision in the Dodd-Frank Wall Street Reform Act that serves much the same purpose as Glass Steagall. It prohibits proprietary trading by taxpayer-guaranteed banks.

Bloom Raskin declared proprietary trading “as an activity of low or no real economic value.”   The “guard rails” to prevent such activity should be “strong and set very close to the road,” she advised.  While the statute permits hedging and market making, she signaled these could be sacrificed as well. “It is not inconceivable to think that the potential costs associated with permitting hedging and market-making within these exemptions still outweigh the benefits we as a society supposedly receive from permitting these capital market activities.” Of Wall Street’s laments about reduced liquidity if bank investment is restricted,  Bloom Raskin signaled little patience: “This so-called liquidity, especially in opaque over-the-counter markets, is potentially illusory and destabilizing.”

Most regulators withhold such explicit public views until they register their votes. If they lobby one another, they certainly don’t tweet the results, or post blogs. But Bloom Raskin’s speech could be interpreted as an effort to lobby her fellow governors to strengthen the regulations to implement the Volcker Rule. And the newly enlightened Sandy Weill may prevail once again; if he does, he can thank Bloom Raskin.

Bartlett Naylor is Public Citizen’s financial policy advocate