Saturday, November 7, 2009

I’m Sorry, So Sorry… Time to Break Up the Big Banks!

Before we get started, let’s bow our heads in a moment of silence for the five additional banks, total now 120, that have failed over the past week costing the bankrupt FDIC another $1.5 billion…


Now, here’s the perfect background music to play as you read just how sorry Mr. Reed is for creating a Citi Group monster and for helping to end Glass-Steagall limits…

Brenda Lee – I’m Sorry:

Reed Says ‘I’m Sorry’ for Role in Creating Citigroup

By Bob Ivry

Nov. 6 (Bloomberg) -- John S. Reed, who helped engineer the merger that created Citigroup Inc., apologized for his role in building a company that has taken $45 billion in direct U.S. aid and said banks that big should be divided into separate parts.

“I’m sorry,” Reed, 70, said in an interview yesterday. “These are people I love and care about. You could imagine emotionally it’s not easy to see what’s happened.”

Citigroup was formed in 1998 when Citicorp, a commercial bank, combined with Sanford I. Weill’s Travelers Group Inc., which owned the investment firm Salomon Smith Barney Holdings Inc. The New York-based company lost $27.7 billion in 2008 and took $118 billion in writedowns. Now 34 percent-owned by the Treasury Department, Citigroup sought help in the wake of a credit freeze that claimed three of Wall Street’s biggest firms and led to the deepest recession in 70 years.

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”

Glass-Steagall Repeal
Lawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”

Reed headed Citicorp for 14 years until the merger with Travelers. The deal created the world’s biggest financial company in a stock swap valued at about $85 billion. Reed and Weill were co-chairmen and co-chief executive officers until Reed’s retirement in 2000.

Citigroup spokesman Stephen Cohen declined to comment.

Reed’s Compensation
From 1997 to 1999, Reed received salary and bonuses totaling $23.4 million, according to Citigroup filings. In 2000, he received a retirement bonus of $5 million, filings show. Citigroup provides him with an assistant and a New York office, for which he pays taxes, he said.

Citigroup, the third-largest U.S. bank, shed about $300 billion in assets, or 13 percent of its total, in the year ended Sept. 30 and is selling what it calls non-core properties, according to regulatory filings. The company said yesterday that it will spin off its Primerica Financial Services subsidiary.

CEO Vikram S. Pandit has eliminated about 100,000 jobs since late 2007, reducing the headcount by 26 percent as of Sept. 30.

Citigroup pioneered the production of collateralized debt obligations, bundles of loans whose cash flows were sold to investors. When subprime mortgage borrowers began defaulting on payments in 2007, the CDOs lost value and became part of Citigroup’s $118 billion in writedowns and credit losses.

In the last year, the bank received $45 billion from the U.S. government to bolster its capital and another $300 billion in loss guarantees. The Treasury Department retained its 34 percent stake after converting a portion of the $45 billion in rescue funds to equity.

Citi's John S. Reed/ Sanford Weill/ Robert E. Rubin 1999

That really is a touching apology. I’m sure it comes from the heart, but I’m also sure he won’t be giving back any of that compensation, bonus, stock, or New York office that he received for being so wrong. Meanwhile, those of us who were correct suffer the fallout. Reed is 100% correct in using the compartmentalized ship analogy, although I’m sure his idea of breaking up the banks differs from mine.

From Great Britain to the U.S., the drum beats are growing louder to break up the big banks. Yes, indeed, they are too big to let survive, there is no such thing as too big to fail, the only systemic danger was believing in those who attempt to rob from the people through their "too big to fail" extortions. History shows that in the end, the only truth in regards to size is “the bigger they are, the harder they fall.”

There is a right way and a wrong way to accomplish that feat, however. Breaking them into their parts and then letting each part run amok, like we did to AT&T, would be nuts. The process of breaking them up FOR REAL could be used to clear the world of the scourge of derivatives and DEBT, but somehow I’m willing to bet that’s not what the central bankers have in mind (note how the bill to audit the Fed has now been gutted of all meaningful audits).

Now Senator Bernie Sanders is proposing legislation to break up the big banks:

Senator Proposes Legislation to Break Up Large Firms

By Alison Vekshin

Nov. 6 (Bloomberg) -- U.S. Senator Bernie Sanders unveiled legislation requiring Treasury Secretary Timothy Geithner to name banks whose collapse may shake the economy and break up the firms in a year, fueling efforts to end taxpayers bailouts.

“If an institution is too big to fail, it is too big to exist,” said Sanders, a Vermont independent. “We should break them up so they are no longer in a position to bring down the entire economy.”

The legislation would give Geithner 90 days to list the commercial and investment banks, hedge funds and insurance companies deemed “too big to fail.” Those firms would be broken up within a year, he said. Representative Paul Kanjorski, a Pennsylvania Democrat, is considering a measure in the House that would break up large financial firms.

Lawmakers seeking to end taxpayer bailouts are considering measures aimed at limiting the size of companies that pose a risk to the financial system. Congress last year set up the $700 billion Troubled Asset Relief Program to shore up Citigroup Inc., Bank of America Corp. and other firms.

“We should end the concentration of ownership that has resulted in just four huge financial institutions holding half the mortgages in America, controlling two-thirds of the credit cards, and amassing 40 percent of all deposits,” Sanders said, citing Bank of America, Citigroup, JPMorgan Chase & Co. and Wells Fargo & Co.

Kanjorski, chairman of a House Financial Services Committee panel on capital markets, this week said he was preparing a measure giving the government power to break apart large firms.

‘Gigantic Tsunamis’
“Nowhere in the world in the future will there be gigantic tsunamis coming out of nowhere and striking the entire world’s economy,” he said on Nov. 4.

The Kanjorski measure would amend Chairman Barney Frank’s draft legislation that creates a regulator council to monitor the economy and firms for systemic risk. The committee today considered proposals to change Frank’s measure, and the chairman has said a final vote by members is scheduled Nov. 20.

“Discussion of breaking up large financial institutions that pose systemic risk to the market is gaining traction on the Hill,” FBR Capital Markets analysts led by Paul Miller said in an investor note Nov. 4. “This legislation is currently in its infancy, and Congress has a number of difficult questions to answer before anything can move forward.”

Federal Reserve Governor Daniel Tarullo said Oct. 21 the idea of breaking up large institutions is impractical, calling it “more a provocative idea than a proposal.” Instead, he said any firm that may pose a risk should be subject to stricter oversight. Former Fed Chairman Alan Greenspan on Oct. 15 said regulators should consider breaking up systemically risky firms.

While this rhetoric sounds good, they will be laughing all the way to the proverbial “bank” if we simply just break them into pieces. If we do that, each part will be resold to the public, the securitization and derivatization process will continue unabated, leverage will still have no bounds, and the entire process will play out once again in the future.

The right way to do it is to expose all assets to the light of day, force the process through bankruptcy, place AND ENFORCE leverage limits on the banks (like Glass-Steagall), and end the practice of creating speculation fields in derivative paper.

I’d like to think that the following tune will be played to all the bankers who have screwed up. If we don’t break the banks up correctly, it’s the bankers who’ll be singing this tune to us…

Connie Francis - Who's Sorry Now: