With Crypto Bank, SoFi, the Fed Is Setting the Stage for the Same Disastrous Decision It Made with Citigroup in 1999

By Pam Martens and Russ Martens: November 29, 2022 ~

Arthur E. Wilmarth, Jr.

Arthur E. Wilmarth, Jr.

If there is one person in America who comprehensively understands the threats to the U.S. banking system, it is Arthur E. Wilmarth, Jr., author of the 2020 seminal book, Taming the Megabanks: Why We Need a New Glass-Steagall Act. Wilmarth is Professor Emeritus of Law at George Washington University Law School and has published more than 40 law review articles and book chapters in the fields of financial regulation and American constitutional history.

Wilmarth had this to say about the way the Fed allowed a crypto outfit, SoFi, to scoop up a federally-insured bank in February of this year:

“The San Francisco Fed relied on the same five-year transitional exemption in the BHC Act [Bank Holding Company Act] to allow SoFi to acquire Golden Pacific Bancorp and its national bank subsidiary despite SoFi’s nonconforming crypto trading activities. I find it astonishing and disturbing that the Federal Reserve Board would allow the San Francisco Fed to issue such a path-breaking approval — which permits a bank holding company to offer crypto trading services to depositors of its subsidiary bank — under delegated authority and without a published opinion.”

Wilmarth was referring to a letter sent on November 21 by Senator Sherrod Brown, Chair of the Senate Banking Committee, and some of his colleagues on that Committee, to federal bank regulators about SoFi. The letter read in part:

“In January 2022, SoFi received approval from the Federal Reserve for the acquisition of Golden Pacific Bancorp, Inc. and a conditional approval from the Office of the Comptroller of the Currency for the creation of SoFi Bank, N.A. SoFi completed the acquisition in February 2022. As part of the approval, the Federal Reserve provided SoFi with two years to divest from SoFi Digital Assets — a nonbank subsidiary that allows retail investors to buy and sell digital assets — or conform the subsidiary’s impermissible digital asset activities to the law. During this conformance period, SoFi has committed not to ‘expand [its] impermissible activities,’ except as specifically authorized by law. SoFi initially agreed to these terms, but since the acquisition, SoFi Digital Assets has apparently expanded its retail digital assets operations.

“Two months after receiving regulatory approval, SoFi announced a new service allowing customers of its national bank to invest part of every direct deposit into digital assets with no fees. The company publicly billed this service as ‘the latest expansion of SoFi’s offerings to make it simpler to get started with cryptocurrency investing.’ SoFi’s own investor protection materials, however, warn customers that at least one token listed on SoFi Digital Assets is ‘a crypto pump-and-dump’ hazard with ‘no special use case or features’ and that ‘[it] might be among the most high-risk endeavors an investor can take.’ Troublingly, this conduct raises questions about SoFi’s compliance with commitments made in the January 2022 approvals and to meeting its ongoing obligations as a banking organization.”

It doesn’t get any crazier than this. A federally-insured bank knowingly peddling a crypto pump and dump scheme through a subsidiary operation.

Wilmarth sees striking parallels between the Fed’s actions with SoFi and how the Fed approved the first merger of a Wall Street trading house, Salomon Brothers, with a federally-insured bank, Citicorp’s Citibank. Wilmarth gave us permission to quote the following from his book on that merger:

“In April 1998, Travelers and Citicorp announced their decision to merge under the name of Citigroup, thereby creating the world’s largest financial institution with over $1 trillion of assets. Travelers was a major insurance company that controlled a large securities broker-dealer (Salomon Brothers), while Citicorp was the biggest U.S. bank holding company. The Citigroup merger created the first ‘universal bank’ that could offer comprehensive banking, securities, and insurance services in the U.S. since the 1930s.

“Citigroup’s co-leaders—Sandy Weill of Travelers and John Reed of Citicorp— declared that Citigroup would offer unparalleled convenience to customers through ‘one-stop shopping’ for a wide range of banking, securities, and insurance services. They argued that Citigroup would have a superior ability to withstand financial shocks by virtue of its broadly diversified activities. Weill proclaimed, ‘We are creating a model financial institution of the future. . . . In a world that’s changing very rapidly, we will be able to withstand the storms.’ Thus, Citigroup’s founders cited the same expected benefits of universal banking that the 1991 Treasury report had touted. Many academics agreed that universal banking would provide significant benefits.

“By approving the Citigroup merger, the Fed ‘challenge[d] both the statutory letter and regulatory spirit’ of the Glass-Steagall and BHC Acts. The only source of statutory authority for the merger was a temporary exemption in the BHC Act, which allowed newly formed bank holding companies to retain nonconforming assets for up to five years. As a banking lawyer explained, that temporary exemption was ‘intended to provide an orderly mechanism for disposing of impermissible activities, not warehousing them in hopes the law would change so you could keep them.’

“The Citigroup merger confronted Congress with a Hobson’s choice: either Congress could repeal the anti-affiliation rules of the Glass-Steagall and BHC Acts or Citigroup would be forced to divest all of its nonconforming activities within five years. The Citigroup deal effectively put a gun to the head of Congress, and it did so with the blessing of the federal government’s leaders. Sandy Weill and John Reed consulted with Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and President Clinton before they announced the Citigroup merger. All three officials endorsed the transaction. Based on those consultations, Reed told the press that Travelers and Citicorp were confident ‘there wasn’t a legal problem’ with the merger.

“The advance clearance that Travelers and Citicorp received from Clinton, Greenspan, and Rubin was extraordinary and, to my knowledge, unprecedented. The kid-glove treatment that top federal officials provided to Travelers and Citicorp merger demonstrated the enormous influence that the largest banks and Wall Street firms wielded in their dealings with politicians and regulators…

“Weill and Citigroup spearheaded the final assault on Glass-Steagall, with enthusiastic support from the Clinton administration. Big banks, securities firms, and insurance companies joined Citigroup in financing that campaign, which spent more than $300 million on lobbying and political contributions.

“Alan Greenspan strongly endorsed the repeal of Glass-Steagall. He told Congress that Glass-Steagall’s ‘archaic statutory barriers’ threatened to ‘undermine the global dominance of American finance’ as well as ‘the continued competitiveness of our financial institutions.’ He hailed the benefits of ‘one-stop shopping’ that he believed universal banks would provide to businesses and consumers.”

Glass-Steagall was repealed in 1999. Nine years later, Citigroup was a basket case being secretly propped up by the Federal Reserve through an alphabet soup of Fed bailout concoctions with names like PDCF (Primary Dealer Credit Facility). The Fed battled the media for more than two years in Federal Court to keep from releasing the dollar amounts of those bailout facilities and the names of the banks that got the money. When Congress forced an audit of the Fed’s bailout facilities to be conducted by the Government Accountability Office, the public learned in 2011 that Citigroup had received more than $2.5 trillion in cumulative loans from the Fed – at below-market rates of interest – from December 2007 through at least June of 2010.

Today, Citigroup’s stock price is still down more than 89 percent from where it was in 2003 when Weill stepped down as CEO. (To dress up its stock price, Citigroup did a 1-for-10 reverse split on May 9, 2011, leaving shareholders with 1 share for each 10 shares previously held. Without that reverse stock split, its shares would have closed yesterday at $4.72 rather than $47.23.)

Sandy Weill and Citigroup also received unabashed cheerleading support for the repeal of the Glass-Steagall Act from an entity that should have employed a critical eye – the editorial board of the New York Times.

In 1988 a Times editorial read: “Few economic historians now find the logic behind Glass-Steagall persuasive.” Another Times editorial in 1990 ridiculed the idea that “banks and stocks were a dangerous mixture,” writing that separating commercial banking from Wall Street trading firms “makes little sense now.”

On April 8, 1998, the Editorial Board of the New York Times became an ecstatic voice for the creation of Citigroup and repealing Glass Steagall, writing:

“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”

To more fully appreciate how rapidly a federally-insured bank can flame out and spread contagion throughout the banking system, consider what we wrote for Counterpunch about Citigroup’s condition on November 24, 2008:

“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant. On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers. (Aren’t Town Hall meetings supposed to instill confidence?) On Tuesday came the announcement of Citigroup losing 53 per cent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet. Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 per cent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars, stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.

“Altogether, the stock lost 60 per cent last week and 87 percent this year. The company’s market value has now fallen from more than $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008. That’s $4.5 billion less than Citigroup owes taxpayers from the U.S. Treasury’s bailout program.

“Also rounding out the week’s news on Friday was the revelation that after receiving $25 billion of taxpayer money, Citigroup would continue to honor its $400 million, 20-year commitment and pay out an installment of $20 million to have the new Mets’ baseball stadium named Citi Field. (Flashback: April 7, 1999: Enron agrees to pay more than $100 million over 30 years to name a Houston stadium Enron Field.)”

Flashback five days ago: Miami-Dade County Florida is trying to strip the name of bankrupt crypto exchange, FTX, from its Miami Heat basketball stadium as the New York Times reports that FTX was allowed to own a U.S. bank.

Clearly, the U.S. banking system is not in competent regulatory hands — or those hands have been tied by inaction from Congress in its failure to pass appropriate legislation. The American people need to put this issue on the front burner before there is a replay of the financial collapse of 2008 – or worse