Ex-Citigroup CEO Weill: Time to Break Up the 'Too Big to Fail' Banks

Sandy Weill
By Jed Horowitz and David Henry

Sanford "Sandy" Weill, the tycoon who built financial conglomerate Citigroup (C) into a massive U.S. commercial and investment bank, said it is time to split up the biggest banks so they can go back to growing again.

The comments were an astonishing about-face for Weill, who in the late 1990's smashed the U.S. law known as "Glass-Steagall" that divided commercial and investment banking. Riskier investment banking activities should be separated from safer commercial banking, and the government should only have to insure the latter, Weill said.

"The world changes, and the world that we live in is different from the one that we lived in 10 years ago," Weill said in an interview with television network CNBC.

Other long-time Wall Street players were quick to applaud Weill. Said Arthur Levitt, Weill's former business partner in the 1960s and a chairman of the Securities Exchange Commission in the 1990s: "It's a very difficult statement for him to make since he was largely responsible for the repeal of Glass-Steagall, and he's absolutely right. This is a very significant statement."

But even if a growing number of former bank executives are calling for big banks to be broken up, there is little evidence that current bank executives or regulators are listening. Big banks are dieting instead of amputating: they are selling smaller units and laying off staff without completely dismantling themselves.

The closest any banks have come so far is in shrinking their balance sheets. Morgan Stanley, for example, said last week that by the end of 2014 it plans to reduce fixed-income trading assets by about 30 percent from third-quarter 2011 levels. Citigroup has reduced its Citi Holdings unit, which holds assets the bank hopes to shed, to $191 billion from about $650 billion in 2009.

Regulators are putting some limits on big banks, lawyers said. They are blocking them from making big acquisitions, and demanding that "too big to fail" banks fund themselves with more equity capital.

Treasury Secretary Tim Geithner said on Wednesday that these steps and others the United States has already taken are serious.

"Congress put in place limits on how large they can get and deprived government of the ability to come in and rescue them from their mistakes," he told lawmakers at the House Financial Services Committee hearing.

A 'Creative' Invsetment Banking Sector

But Weill called for far deeper changes among the major banks, noting that when investment banks are no longer eligible to be bailed out by the Federal Reserve, they can go back to innovating and growing fast.

"Let's have a creative investment banking system like we have always had, so that the financial industry can once again attract the best and the brightest like they are doing in Silicon Valley," Weill said, referring to the region near San Francisco often seen as the epicenter of the technology sector.

The Glass-Steagall law, known as "The Banking Act of 1933," was passed during the Great Depression to help restore faith in banks. It revamped the financial system, creating, for example, deposit insurance, in addition to separating commercial and investment banking.

Looser regulations in the 1980s and 1990s chipped away at Glass-Steagall. But when Weill's Travelers Group, which included an insurer and the Salomon Brothers investment bank, took over Citicorp in 1998, it needed a special temporary regulatory exemption to operate those businesses together.

Weill lobbied heavily for key provisions of Glass-Steagall to be repealed, a change he won in 1999. Since then, the U.S. banking system has become considerably more concentrated.

A Growing Chorus

Other major former bank executives have also called for banks to be split up. Phil Purcell, the former chairman and chief executive officer of Morgan Stanley (MS), wrote in an opinion piece in The Wall Street Journal last month that shareholders would benefit from such moves.

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Breaking up the biggest banks could double or triple the value of the companies, Purcell wrote. Purcell long advocated for "financial supermarkets" starting with his work at McKinsey in the 1970s.

John Reed, the former chief executive of Citicorp who worked with Weill on the 1997 merger with Travelers, said in March that he regrets his role and is astounded at the way banks continue to fight regulations to rein in risky activities.

"It wasn't that there was one or two or institutions that, you know, got carried away and did stupid things. It was, we all did ... and then the whole system came down," Reed said on Bill Moyers' public television show.

Former regulators have also argued for break-ups. Sheila Bair, chairman of the Federal Deposit Insurance Corp until last year, wrote in a January column in Fortune that shareholders should press for banks to break themselves up, and that banks' customers would benefit.

Soon after JPMorgan Chase's (JPM) Chief Executive Jamie Dimon said the bank could lose billions from bad credit derivatives trades in May, Bair wrote another column calling for big banks to be broken up because they are too big to manage effectively.

There is some limited support for breaking up banks in Washington. Sen. Sherrod Brown (D-Ohio) has introduced a law that would limit how big banks can get, for example through limiting how much they can borrow and how big they can be relative to the overall economy.

The senator said in a statement on Wednesday, "Allowing Wall Street megabanks to grow so large and over-leveraged ... isn't fair to taxpayers."

But Brown's bill is seen as a longshot, and Bair noted in her May column that "in Washington, no one is seriously discussing breaking up the big banks."

The Safest Banks You Can Trust
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Ex-Citigroup CEO Weill: Time to Break Up the 'Too Big to Fail' Banks

BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.

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Photo: Les Stockton, Flickr.com

KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.

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PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).

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M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.

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Photo: Afagen, Flickr

U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.

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Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.

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Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.

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Many on Wall Street were flabbergasted by Weill's comments. "I think it was a guy with a mask on who looked like Sandy Weill," said Alan "Ace" Greenberg, the former chairman and chief executive of Bears Stearns, who's now an adviser with JPMorgan Chase & Co.

"I've known Sandy for a long time and it didn't sound like him to me," Greenberg added.

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