Mega-bank Pioneer Rethinks The World He Built

The name Sanford Weill probably doesn't mean much to the average bank customer, but if you are a U.S. account-holder -- or even just an American taxpayer -- he has probably had an impact on your finances.

Weill was one of the leading architects of the mega-bank model, the vision that combining traditional banking with speculative investment activities would lead to bigger and better financial services companies. By now, you probably recognize how that idea turned out.

And to his credit, Weill seems to recognize it too.

The brave new world of banking

As the 20th century drew to a close, banking seemed to be entering a brave new world. Through a series of mergers and acquisitions, a new wave of giant institutions were emerging. Weill co-headed Citigroup, which was formed as a result of a merger of Travelers and Citicorp.

At the same time, Weill and other major banking figures lobbied for the repeal of the Glass-Steagall Act, a Great Depression-era law that separated a bank's deposits from its investment activities. The premise was that profits from investments could help subsidize a bank's deposit business, allowing banks to offer higher rates on savings accounts and other perks such as free checking.

Instead, within a decade of Glass-Steagall's repeal, the mix of guaranteed deposits with highly-speculative investments led to a financial crisis that would have caused a systemic collapse -- if not for massive government intervention. While stopping short of apologizing, Weill now acknowledges that the mega-bank model may not be best for the industry going forward.

As conversions go, this ranks just slightly below Saul on the road to Damascus or Robert McNamara's admissions about the Vietnam War. In short, Weill may once have been part of the problem, but precisely because of this, his view of the solution is something worth considering.

The simplicity of separation

Speaking recently on CNBC, Weill stated that the best idea now might be to fully separate traditional banking and investment activities at financial institutions. This would mean that depositor money would no longer fund investment activities and deposits would no longer be endangered by investment losses. As a result, both the FDIC insurance pool and taxpayer money (in the form of potential bailouts to troubled institutions) would also be saved from paying for those investment losses.

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