A remorseful John S. Reed, former Chairman and CEO of CitiCorp, appeared before the Senate Banking Committee yesterday as he called for full financial regulatory reform including a dedicated consumer-focused financial protection agency.  ”There seems to have been a key failure that none of us anticipated,” Reed said in a prepared statement at a Senate Banking Committee hearing, “namely, individual institutions which are thought to take steps and exercise judgments to insure their self-preservation turned out ‘not to have’ or been incapable of so doing.

The former Chairman and CEO went further:

In response to a question from Senator Bob Corker (R-Tenn.), who called Reed’s testimony “fascinating” given that he presided over Citigroup at a time when it was expanding in all these areas, Reed said it was exactly that experience that informs his view now.
“I learned a lot,” Reed said, joking that this may be the first time he has ever agreed with former Federal Reserve chairman Paul Volcker on anything. “There’s no question that when we put Travelers and Citi together we created a monster.”

“My honest belief having experienced it…is that the system would be stronger if we could provide for some separation where major depositories are not major actors in the capital markets,” Reed said.

“This clearly means that in designing a robust system, we cannot count on that capacity.”  Mr. Reed decribed what the essential elements of financial regulatory reform must be below.

The capital held by financial firms to protect against potential losses “should be significantly increased, maybe doubled.” He added that he thinks the concept of “risk adjusted capital,” a complex system used by regulators to judge whether a bank has adequate cash, “is flawed.”

The industry should be “compartmentalized” to limit the spread of failures and to preserve “cultural boundaries.”

Traded products (to the extent possible) should flow through exchanges. Much of the derivatives market is currently in the dark, traded over the phone rather than through a centralized exchange where regulators could know what’s going on.  

A consumer-focused financial protection agency with a “clear and separate mandate” should be created.

Are you listening Sen. Dodd???