The crowd that wants to break up the biggest banks in the wake of the financial crisis has a new member — a former big banker.
Sanford "Sandy" Weill, who helped build Citigroup Inc. into one of the nation's largest financial institutions, shocked many people Wednesday when he said that investment banking should be separated from traditional banking.
"I think what we should probably do is go and split up investment banking from banking. Have banks be deposit takers. Have banks make commercial loans and real estate loans. And have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail," Weill, the former chief executive and chairman of Citigroup, said on CNBC's "Squawk Box." (His comments start at about the 3:25 mark in the video below).
Host Becky Quick asked Weill if he was really suggesting the "pretty radical idea" of breaking up the biggest banks.
"That's exactly what I am suggesting," he said.
Weill would like to reinstate a version of the 1933 Glass-Steagall Act, which prohibited deposit-taking banks from also operating as investment banks. Regulators began loosening the law's limits in the late 1970s and Congress fully repealed it in 1999.
Since the financial crisis and the bailouts that followed — including of Citigroup — many critics have blamed the repeal of Glass-Steagall for allowing some banks to become "too big to fail." Some in Congress have been pushing to reinstate a prohibition on banks that hold deposits insured by the Federal Deposit Insurance Corp. from underwriting or investing in stocks.
Others have called for new limits on the size of banks to reduce the possibility that a future bank crisis could threaten the economy. Sen. Sherrod Brown (D-Ohio), for example, has been pushing legislation that, among other things, would limit any one bank from having more than 10% of the total insured deposits in the U.S.
"Sanford Weill is one of many banking industry experts who have observed that too big to fail is often too big to manage," Brown said. "Allowing Wall Street mega-banks to grow so large and over-leveraged that their downfall would send ripples throughout our entire economy isn't fair to taxpayers and it isn't fair to mid-sized and community banks who don't enjoy the implicit guarantee from the Treasury Department that comes with too big to fail status."
Treasury Secretary Timothy F. Geithner declined to comment specifically on Weill's statements when asked about them at a House Financial Services Committee hearing Wednesday. The Obama administration chose not to reinstate Glass-Steagall as part of the sweeping financial reform law enacted in 2010.
But Geithner noted that the size of the biggest banks "is a widespread and common subject of concern."
“We did force these banks to hold much, much more capital against the risks they take," Geithner said. "We forced a dramatic restructuring of the financial system. Congress put in place limits on how large they can get and deprived the government of the ability to come in and rescue them for their mistakes in very significant ways."