Breaking up the banks?

The Citigroup logo since 1999, re-introduced in 2012 with blue lettering.

Sandy Weill, the big banker most associated with breaking down the government barrier between investment and commercial banking to form Citigroup, now says that big banks should be broken up to protect taxpayers.  

Richard Kovacevich, the former CEO of Wells Fargo (full disclosure: my clients and I own shares of Wells Fargo), says banks are safer as big banks.

Who’s right?  Who should voters, legislators, regulators, the Federal Reserve, the executive branch, the press, etc. listen to?

Let’s look at their respective records.

Citigroup was formed by the merger of Travelers group–run by Weill–with Citigroup in 1998.  Citigroup’s split-adjusted stock price was over $300 per share in April 1998, the month its merger occurred. Weill was chairman of Citigroup until he retired as CEO in 2003 (Citigroup: $474 per share) and chairman in 2006 ($500 per share).  Weill hired as his successor Chuck Prince, who later became famous for excusing Citigroup’s participation in the sub-prime meltdown by saying, “as long as the music is playing, you’ve got to get up and dance.” Prince chose to enter early retirement in November 2007 after Citigroup blew up.  Citigroup gladly took $45 billion in assets from the government’s Troubled Asset Relief Program (TARP) in 2008 and 2009 and has paid back only 44% ($20 billion). Citigroup also received $306 billion in asset guarantees as part of the TARP program. Citigroup’s stock price crashed to $15 per share in 2009 (down 97% from May 2007), and is currently around $28 (down 91% since the Citigroup merger, and 94% since Weill retired as CEO and chairman).  

Wells Fargo was formed by the merger of Norwest Corp.–run by Kovacevich–with Wells Fargo in 1998.  Wells Fargo’s split-adjusted stock price was $18 in November 1998, the month its merger occurred. Kovacevich stepped down as CEO in 2007 ($35) and chairman in 2009 ($27). Kovacevich’s successor, John Stump, is still CEO and chairman of Wells Fargo.  Wells Fargo was forced (Kovacevich has been quite vocal in his criticisms of TARP and how he pounded the table–literally–trying not to be forced to take the funds) to take $25 billion in TARP funds and repaid them in full as soon as the government would allow it. Wells Fargo received no asset guarantees as part of TARP. Wells Fargo was strong enough during the financial crisis of 2008 to buy out distressed Wachovia (snatched from Citigroup’s clutches because Citigroup required government loss guarantees to buy Wachovia). Wells Fargo’s stock price fell to $12 per share in 2009 (down 67% from May 2007), and is currently $34 (up 89% since the Wells Fargo merger, and down 3% and up 26% since Kovacevich retired as CEO and chairman, respectively).

Basically, Weill created a Frankenstein’s monster of a bank that, not surprisingly, blew up during the financial crisis of 2008. Weill was a deal-maker that used his political influence and bluster to build an unstable house of cards that collapsed with the first real puff of wind. His bank would have gone under without government guarantees that are outstanding to this day. Not only did his bank fail on almost every measure, it destroyed 90% of shareholder value. Why exactly would anyone want to listen to this “expert’s” opinion?

Kovacevich, on the other hand, built Wells Fargo slowly and stably over time. His bank was sound enough to handle the worse financial crisis since the Great Depression, so much so that he could afford to bail out another large unstable bank without any government assistance. He did it because he understood banking instead of political influence. Under his stewardship and that of his successor’s, Wells Fargo has succeeded on almost every measure and has created value for shareholders. Kovacevich is the type of expert that people should be listening to, and he’s not calling to break up the banks.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Breaking up the banks?