The Citigroup lesson: Big is not necessarily better

As the financial giant staggers, can someone remind us again why repealing Glass-Steagall was a good idea?

By Andrew Leonard

Published November 21, 2008 2:56PM (EST)

The perils of Citigroup, an "icon of capitalism," according to the Wall Street Journal.

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter.

A little over two months ago, when investment banks started to drop like flies, there was a rousing debate in the blogosphere on the question of how much of our current woes could be traced back to the repeal of the 1930s-era Glass-Steagall Act by the Gramm-Leach-Bliley Act of 1999. A number of respected economic voices, including Tyler Cowen, Bradford DeLong, and Justin Fox, made the provocative case that we should be thankful for the repeal of Glass-Steagall's separation of commercial banks and investment banks, because at that time, the big commercial banks, including Citigroup, JPMorgan Chase, and Bank of America, seemed relatively immune to the credit crunch. Who else would have had the capacity to swallow up Merrill Lynch and Bear Stearns, if not for these liberated giants?

I think that this thesis has taken a bit of a hit in recent days. Citigroup appears to be in big trouble, and JPMorgan Chase and Bank of America both experienced debilitating stock slides on Friday, potentially also putting them in some jeopardy. If there is a lesson to be learned right now, it might be that big is not necessarily better. If you're too big, you can't be allowed to fail, and if you're really, really big, like Citigroup, there is a very limited pool of possible rescuers.

As in, in the case of Citigroup, a pool of one. Now Brad DeLong says it is "Time for the Government to Buy Citigroup."

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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