Sandy Weill’s About-Face on Glass-Steagall

Isn’t it something how a former Wall Street baron named as one of Time magazine’s “25 People to Blame for the Financial Crisis” suddenly becomes a paragon of wisdom in the eyes of the media elites as soon as he advocates something they favor?

That’s essentially what happened to former Citigroup CEO Sandy Weill, who championed repeal of the Depression-era Glass-Steagall banking restrictions in 1999, oversaw a firm that made bad mortgage bets in the following decade that almost caused the firm to implode, and now says he changed his mind and wants a restoration of the New Deal legislation separating commercial banking from investment banking and insurance.

Weill is being congratulated by politicos and pundits for at last seeing the “error” of his ways. An alternative explanation for his about-face is that he is fashionably blaming “deregulation” for his own gross errors in running Citi. Whatever the reason, Weill’s change of heart doesn’t change the facts: The mortgages Citi made were not at all enabled by Glass-Steagall’s repeal, but by the subsidies and guarantees of government entities such as Fannie Mae, Freddie Mac, and — in Citi’s case in particular — the Federal Housing Administration (FHA).

Weill pushed to end Glass-Steagall not so that Citi could make or securitize mortgage products — banks had long had that power — but so that Citi could branch into insurance. He lobbied for the Gramm-Leach-Bliley Act, signed by President Clinton in 1999; it repealed the bulk of Glass-Steagall, enabling Citi and its banking operation to merge with the Travelers Group and its insurance subsidiaries. Does anyone actually contend that Citi’s control of Travelers’ insurance operations somehow led to the financial meltdown a decade later? That would be a tough argument to make.

Indeed, this point would be especially difficult to argue for one simple reason: Shortly after the repeal of Glass-Steagall, Citi and Travelers broke up. Citigroup spun off Travelers Property and Casualty into a separate company in 2002, and it sold Travelers Life & Annuity to MetLife three years later.

The banking firm probably would have been better if it had used its new freedom from Glass-Steagall to hold on to Travelers. In June 2009, Travelers replaced its erstwhile parent Citigroup on the Dow Jones Industrial Average. Today, Travelers is 112 on the Fortune 500.