Richard Parsons, speaking two days after ending his 16-yeartenure on the board of Citigroup Inc. and a predecessor, said thefinancial crisis was partly caused by a regulatory change thatpermitted the company's creation.

The 1999 repeal of the Glass-Steagall law that separated banksfrom investment banks and insurers made the business morecomplicated, Parsons said yesterday at a Rockefeller Foundationevent in Washington. He served as chairman of Citigroup, thethird-biggest U.S. bank by assets, from 2009 until handing off therole to Michael O'Neill at the April 17 annual meeting.

“To some extent what we saw in the 2007, 2008 crash was theresult of the throwing off of Glass-Steagall,” Parsons, 64, saidduring a question-and-answer session. “Have we gotten our armsaround it yet? I don't think so because the financial-servicessector moves so fast.”

The 1998 merger of Citicorp and Sanford I. Weill's TravelersGroup Inc. depended on the U.S. government overturning the portionof the Depression-era act that required banks to be separate fromcapital-markets businesses like Travelers' Salomon Smith BarneyHoldings Inc. Parsons, who was president of Time Warner Inc. at thetime, had been a member of the Citicorp board before joining theboard of the newly created Citigroup.

“Why didn't he do something about it when he had a chance to?”Mike Mayo, an analyst at CLSA in New York who rates Citigroupshares “underperform,” said in a phone interview. “He's a coupledays out the door and he's publicly criticizing the ability tomanage the company.”

Unlike John S. Reed, the former Citicorp CEO who said in 2009that he regretted working to overturn Glass-Steagall, Parsons saidhe didn't think that the barriers can be rebuilt.

“We are going to have to figure out how to manage in this newand dynamic world because there are good and sufficient businessreasons for putting these things together,” Parsons said. “It'sjust that the ability to manage what we have built isn't up to ourcapacity to do it yet.”

Parsons didn't refer to Citigroup specifically during hiscomments and Shannon Bell, a spokeswoman for the bank in New York,declined to comment. Mayo said Parsons' comments show he views theNew York-based bank as “too big to manage.”

“This gives more support to the new chairman to take moreradical action,” said Mayo, whose book “Exile on Wall Street” wascritical of Parsons and the management of banks includingCitigroup. “Citigroup needs to be reduced in size whether that'sbreaking up or additional asset sales or whatever it takes.”

'Separate Houses'

Parsons said in a phone interview after the event that it wasdifficult to find executives who could run retail banks andinvestment banks in the U.S. because the two businesses had beenseparated by Glass-Steagall for about 60 years.

“One of the things we faced when we tried to find new leadershipfor Citi, there wasn't anybody who had deep employment experiencein both sides of what theretofore had been separate houses,” hesaid. Chief Executive Officer Vikram Pandit is trying to changethat, Parsons said. “I think if you ask Vikram he'd say probablyhis biggest challenge long-term is developing the management.”

Banks are growing because corporations and other clients wantthem to, and management must meet the challenge, he said.

“People have a sort of a notion that 'well, we can decide that'stoo big to manage,'” he said. “But it got that way because therewas a market need and institutions find and follow the needs of themarketplace. So what we have to do is we have to learn how toimprove our ability to manage it and manage it moreeffectively.”

Citigroup, which took the most government aid of any U.S. bankduring the financial crisis, has lost 86 percent of its value inthe past four years, twice as much as the 24-company KBW BankIndex. Most shareholders voted this week against the bank'scompensation plan, which awarded Pandit about $15 million in totalpay for 2011, when the shares fell 44 percent.

Shareholders' views shouldn't be “given the same level ofweight” as those of the board and management, Parsons said.Companies “shouldn't make the mistake of putting them in thedriver's seat.”

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