It's Time To Break Up Massive Banks!

by Georg Mascolo

Spiegel
August 1, 2012

For decades, America's Glass-Steagall Act ensured a clean division of commercial and investment banking. But its repeal helped pave the way for the global financial crisis. Today politicians should restore the dual banking system to help ensure that banks that are too big to fail do not exist in the future.

The banks are blackmailing us, Sigmar Gabriel, the head of Germany's center-left Social Democratic Party wrote in a position paper for his party. But with the fuss over Gabriel's partly justified and partly exaggerated claim, one hopes that the most important words spoken last week will not get lost in the noise.

Those words were from Sandy Weill, who for eight years was the decisive figure at Citibank, the major American bank. This is the same Sandy Weill who forged a financial empire and successfully fought against just about every regulation that has been thrown at the banking sector. His message today? Split up the massive banks.

What Weill is calling for is a return to rules that already once served the world well. They were conceived during the 1930s financial crisis and then disposed of during the liberalization frenzy of the 1990s.

The Glass-Steagall Act is the name of the law that divided the banking world into two categories.

The first is banks that are dedicated to the classic business of managing customer deposits and issuing loans making them systemically relevant. These banks must be protected and, in an emergency, rescued by the state.

The second is investment banks, which too often have no problem at all with any risky business that comes its way as long as it promises to deliver profits. Weill believes that if things go awry at the investment banks that no one should be too quick to bail them out. These banks would be smaller and no longer the financial Goliaths that they are today. What is deemed too big to fail, would be deemed too large to even be allowed to exist in the future.

America, as well as the entire financial world, is discussing Weill's proposal.

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