The Weekend That Changed Wall Street

the Glass-Steagall Act, a major move toward bank deregulation. Glass-Steagall—named for the two men who wrote the bill, Senator Cantor Glass, Democrat of Virginia, and Representative Henry Bascom Steagall, Democrat of Alabama—became law in 1933, during the height of the Great Depression. At the time there was a strong belief that the collapse of Wall Street was largely due to reckless investing by commercial banks. Glass-Steagall created a barrier between investment and commercial banks that would make such recklessness impossible. However, the law was viewed as a thorn in the side of banking, and the industry had been lobbying for its repeal for many years. Finally, in 1999, the campaign, spearheaded by Senator Phil Gramm of Texas, was successful, and Congress repealed Glass-Steagall. Gramm’s efforts had the full support of Federal Reserve chairman Alan Greenspan, Treasury secretary Robert Rubin, and President Bill Clinton. Indeed, Rubin told Congress as early as 1995, “The banking industry is fundamentally different from what it was two decades ago—let alone in 1933.” Rubin believed that the rise of globalization demanded a more open and flexible investing environment, and he viewed Glass-Steagall as a roadblock. Later, when Larry Summers replaced Rubin at Treasury in the final years of the Clinton administration, he got on board as well. Many Monday-morning quarterbacks blamed the events of 2008 on this critical piece of deregulation—something I asked Clinton about the week after Lehman’s failure. Clinton vehemently denied that the repeal of Glass-Steagall was to blame for Wall Street’s collapse, and he defended his administration’s decision to repeal the act. “We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure,” he said. “I thought at the time that repealing Glass-Steagall might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis.”

I pushed him. “Phil Gramm, who was then the head of the Senate Banking Committee, and until recently a close economic adviser of Senator McCain’s, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?”

Clinton shook his head. “Not on this bill, I don’t think he did. On Glass-Steagall, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence. This wasn’t something they [Republicans] forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for commercial banks to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.”

Back in the 1990s, the most fervent champion of the repeal of Glass-Steagall was Jamie Dimon’s old boss, Sandy Weill. It’s likely that only a guy like Weill, with such a remarkable storehouse of grit, and such a giant ego, could have made the impact he did.

In 1996 Weill, then the head of Travelers Insurance, proposed an unprecedented merger of Travelers and Citibank. Such a consolidation was not legal under Glass-Steagall. Weill, along with Citibank head John Reed, and with the tacit backing of Fed chairman Greenspan, began an aggressive campaign against Glass-Steagall that led to its repeal. He was shouting, in effect, “Mr. Clinton, tear down that wall!” The relentless assault on Glass-Steagall finally wore away all resistance in Congress and in the White House. From then on, whenever people talked about the 1999 repeal, Sandy Weill’s name was front and center.

Citigroup went on to become a virtual financial superstore—the largest and most complex banking operation in the world. Few could argue with Weill’s record of creating a powerhouse in global banking. He was actually ahead of regulation changes, nearly closing the deal with Travelers even before Glass-Steagall ended. But he also stitched together a company rife with conflicts, which created major problems during the peak of the markets when investment bankers were pushing for deals, analysts were recommending their stocks, and everyone was in bed together. It was said at the time that Weill was not above cronyism, such as the time he interceded with the admissions office of the elite 92nd Street Y preschool as a favor to analyst Jack Grubman, who simultaneously upgraded AT&T, later causing regulators to suggest he did it so that Citi could get at AT&T’s lucrative investment banking business. This would ultimately help to push Weill out.

When Weill was pressured to step down as CEO in April 2003, he handpicked his lawyer and closest lieutenant, Chuck Prince, as his successor. Although Prince was loyal to Weill and spent seventeen years in his service, he knew nothing about running a global organization with two hundred thousand people. The biggest criticism of Prince among insiders was that he was a lawyer, not a manager. Staffers told me that he rarely listened to advisers, including Weill, and the company faltered severely on his watch. Citigroup stock plummeted from a high of $57 per share to 97 cents during the worst of it. Prince was forced to resign in November 2007, as Citigroup’s value plunged. It was clear that Weill’s grand vision of a global superstore was being challenged.

With the legacy of Citigroup and other giants of finance and banking in tatters, people were frantically searching for someone to blame. In retrospect, for the broad market, it is clear that the biggest issue was too much easy money. Low interest rates created a very attractive environment to borrow. Too much liquidity had individuals borrowing more and more to buy homes, and Wall Street securitizing those loans to lock in bigger returns.

Greenspan, who had been Fed chairman for seventeen years before stepping down in January 2006, was a target of some who believed that he oversaw an era of irresponsibility that combined low interest rates