Banking behemoth makes radical proposal: Split them up

NEW YORK — Sandy Weill is having a change of heart.

Weill, the aggressive dealmaker who built Citigroup on the idea that in banking, bigger is better, said he believes big banks should be broken up.

Speaking on CNBC’s “Squawk Box” this week, the 79-year-old Weill appeared to shock the show’s anchors when he said that consumer banking units should be split from riskier investment banking units.

That would mean dismembering Citigroup as well as other big U.S. banks, such as JPMorgan Chase and Bank of America.

It’s an idea that’s traditionally more in line with the banking industry’s harshest critics, not its founding fathers. It’s an ironic twist coming from an empire-builder who nursed Citigroup into a behemoth. And it’s directly opposed to the stance of the industry’s current leaders, like JPMorgan CEO Jamie Dimon, who have been trying to convince regulators and lawmakers of just the opposite, that big banks do not need to be split.

Weill said the radical change is necessary if U.S. banks want to rebuild trust and remain on top of the world’s financial system. Weill also criticized banks for taking on too much debt and not providing enough disclosure about what’s on their balance sheets.

“Our world hates bankers,” he said.

Big banks have been villainized in the financial crisis and its aftermath. Critics blame them for risky trading that created a housing bubble and eventually led to global economic upheaval. In some circles, there’s still resentment that the government used taxpayer money to give bailout loans to the biggest banks, including Citigroup, because regulators believed that the financial system wouldn’t be able to handle their failure.

But stand-alone investment banks, Weill said, wouldn’t take deposits, so they wouldn’t be bailed out. Banks that have both investment banking and consumer banking say it’s necessary to keep them together because they balance each other, ensuring stability no matter the economy.

Investment banking, which offers services like trading stocks and packaging loans into securities, can be spectacularly profitable in the good times and spectacularly unprofitable in the bad. Consumer banking, the plain-vanilla business of making loans and accepting deposits, generally offers a steadier, if slower, way to make profits.

Until the late ‘90s, the Glass-Steagall Act largely kept consumer banks and investment banks separate. Glass-Steagall was created during the Great Depression. The separation rules were repealed in 1999.

Weill’s professed conversion set off a flurry of reactions. The banking industry’s critics hailed it as proof that the biggest banks should be split. “Sanford Weill is one of many banking industry experts who have observed that too big to fail is often too big to manage,” Sen. Sherrod Brown, D-Ohio, said in a statement.

Others were unimpressed.

Joshua Brown, a New York investment adviser who writes the blog “The Reformed Broker,” called Weill “the original architect of Too Big To Fail” banking and noted that Weill didn’t apologize “for the Citigroup he built or its imitators.”

“Perhaps this is about burnishing his legacy,” Brown wrote.

Weill said he hadn’t talked to JPMorgan’s Dimon or Vikram Pandit, Citigroup’s current CEO, about his new stance. Dimon was Weill’s protégé before getting ousted in a power struggle in the late ‘90s. Pandit took over at Citigroup after Weill’s friend, Chuck Prince, lost the job.

Asked what he thought their reaction would be, Weill replied, “I don’t know. You’ll find out.”

A Citigroup spokeswoman declined to comment. A JPMorgan spokesman didn’t immediately return a message seeking comment.

In the same interview, Weill showed his fondness for the industry. He credited megabanks for providing capital markets that helped convert communist countries to capitalism, and moved poor people into the middle class.

“It is really sad what is happening, and it’s sad for young people,” he said. “This was an industry that attracted a lot of really terrific people.”

Weill retired as CEO of Citigroup in 2003 but remained chairman until 2006, building it into a giant that offered both consumer and investment banking.

Asked about his about-face, Weill said he had been getting his thoughts together over the past year.

“I think the world changes,” he said, “and the world that we live in is different than the one that we lived in 10 years ago.”