Decisions made almost exactly 25 years ago, in the first two weeks of April 1998

 As banks fail and regulators strive to arrange rescues, there’s much talk that we’ve turned back the clock 15 years to the Global Financial Crisis. 

I’d like to suggest that instead we are finally confronting the costs of decisions made almost exactly 25 years ago, in the first two weeks of April 1998.

Citicorp and Travelers Group — a financial conglomerate which at that point included the Salomon Smith Barney investment bank and the Travelers insurance company — were to merge. 

Their merger was significant because it plainly contravened the Depression-era Glass-Steagall Act, which separated commercial and investment banking and barred banks from owning insurers. 

A week after the Citi-Travelers deal, the merger between NationsBank of Charlotte and BankAmerica of San Francisco was announced to create what is now Bank of America.

Tellingly, the moment that stocks hit bottom and began to rise in March 2009 came when investors were finally convinced that BofA and Citi were not going to be nationalized, a fate that many had thought inevitable. 

Neither Weill nor Reed any longer believes that ending Glass-Steagall was a good idea. Weill said in 2012 that a new split between commercial and investment banking was needed to regain innovation in finance. Reed told me in 2013 that the cultures of investment and commercial banking are too different to be merged under one roof. 

Instead of Glass-Steagall, there was the “Volcker Rule”. It aimed to stop deposit-holding institutions from proprietary trading, or investing in or sponsoring hedge funds or private equity. It grew very complicated and has been diluted since.

That dive for the banks is one for the history books. Falls like this don’t happen at all often, and when they do tend to mean bad things for everyone else. 

John Authers Bloomberg 24 mars 2023


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