in bold are the key points. Neither of the two presidential
contenders has the courage and foresight to break up the cartel,
although its breakup is key to restoring prosperity.
The Wall Street Journal
July 27, 2012, 6:39 p.m.
Sandy Weill Still Doesn't Have the Answer
The banker-government consortium re-exposed in
the Libor scandal won't be unwound from the top.
By HOLMAN W. JENKINS, JR.
Sandy Weill was impressive as a scrambler, a dealmaker, a man who could
catch a wave. He's come out of retirement now, a decade after creating the
Citigroup oligopolist, to catch a new wave, declaring on CNBC that investment
banking and commercial banking should be re-separated.
He explains that bank bailouts and too big to
fail would no longer be necessary, without explaining how, since both bank
bailouts and too big to fail predated the repeal of Glass-Steagall.
Mr. Weill finds himself suddenly welcome in the
company of editorialists who, since the Libor scandal, have been renewing their
clamor for bankers to be imprisoned, if not executed. He's become their new
The inherent Stalinism of those who crave to put
bankers in jail for things that aren't crimes is not unlike that of the
original Stalinist—who understood that nothing of substance has to change if
you've got enough scapegoats. Likewise, Mr. Weill's proposal to restore
Glass-Steagall would also change nothing.
Even too big to fail is too small a phrase. Do not interpret the following
conspiratorially: The total coalescence of the financial elite with the
governing elite in our and other countries is a natural pattern. It may be
corrupting. It may be counterproductive. But it's the natural outcome of the
giant, almost inconceivable amounts of debt the U.S. and other governments ask the
financial system to market and hold on their behalf.
If you owe the bank $1
million, the bank owns you. If you owe $1 billion, you own the bank. If you owe
several trillion, you are the financial system. Libor is called a key
underpinning of global finance. But that's far more true of IOUs issued by the U.S. government
and its major counterparts. The global financial system is built on a mountain
of government debt, and in turn banks and their governments are bedfellows of a
highly incestuous order.
That's why, in every transcript and phone
memorandum that has come to light, in talking about Libor, regulators and
bankers talk to each other as if they were all just bankers talking amongst
That's why, when a high British official
suggested that Barclays lowball its Libor submission during the financial
crisis, Barclays didn't hesitate because, as one banker testified to the
British Parliament, these were government instructions "at a time when
governments were tangibly calling the shots."
It's ironic to think that some who championed
the euro saw it as way to break free of rule by bankers. Europe's new monetary
authority would be focused on a producing a stable currency; Europe's
national governments would have no choice but to live within their means.
This experiment failed because the European
Central Bank quickly adopted policies designed to induce banks not to
distinguish between the debts of disciplined and undisciplined governments.
That is, the euro was immediately corrupted by the need to help governments
keep financing themselves.
Now the world is Europe. Under the current regime of financial repression,
banks and states are even more annexes of each other. Notice Japan's central
bank explicitly stating plans to erode the value of the government's debt in
the hands of Japanese savers. Notice the European Central Bank again hinting at
readiness to buy the debt of countries no longer able to find voluntary buyers
in the market. In the U.S.,
how long before the Treasury issues a perpetual bond yielding zero percent for
direct sale to the Fed?
The banker-government consortium re-exposed in
the Libor scandal won't be unwound from the top, not when governments are more
dependent than ever on a captive financial system to give their debt the
illusion of viability. And yet there's still a possibility of unwinding it from
the bottom, by giving large numbers of bankers an incentive to get out of the
government-insured sector and go back to a world in which they live by their
own profits and losses.
The solution begins with
deposit-insurance reform. The FDIC would stop insuring deposits that are
invested in anything other than U.S.
Treasury paper. The FDIC would be charged solely with seizing these assets when
a bank gets in trouble so the claims of insured depositors can be satisfied.
There'd be no call to bail out other creditors or shareholders to minimize the
cost to the deposit insurance fund.
Yes, the threat might be
only semi-credible. But such a law could be got through Congress and
risk-averse lenders would become less interested in holding uninsured credits
against banks that are too big to manage and too opaque to be viable without a
The J.P. Morgans, Citis
and Banks of America
would stampede to get smaller. Finance could return to its natural role,
arbitraging between good assets and bad ones. Who knows, we may yet need that
function again one day to get out of our debt mess.
version of this article appeared July 28, 2012, on page A17 in the U.S. edition of
The Wall Street Journal, with the headline: Sandy Weill Still Doesn't Have the
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