Weill Can't Kill Banking Monster, but Shareholders Can

NEW YORK (TheStreet) -- Sanford 'Sandy' Weill -- the man credited with creating our present-day 'too big to fail' banking system -- won't be the one to shatter it.

Instead, 'too big to fail' bank breakups will likely come from shareholders, armed with economic arguments and disappointing profit and loss statements on their bank holdings, according to industry watchers.

After building Citigroup (C), the bank that put an end to the Glass Steagall Act, Weill ironically is now creating a new groundswell to reinstate the banking sector separation.

On CNBC, Weill -- who led the 1998 merger of Travelers Group and Citicorp to form Citigroup -- said that it's time for the United States to "go and split up investment banking from banking." The financial crisis, Weill said, "was created by too much concentration in investments in the banking system, way too much leverage, [and] very little transparency with lots of off-balance sheet things that didn't really count, and I think a lot of those things have to change."

Weill's comments come at a time when the underperformance of universal bank shares, a litany of scandal including a $5.8 billion trading loss at JPMorgan (JPM), a rate-fixing scandal that originated at Barclays (BCS) and may spread across Wall Street, and new regulations like the Dodd Frank Act raise serious questions about the health of the financial sector.

A split of up investment banks from commercial banks will happen, "because the forces of economic gravity are just so overwhelming that it has to happen," says Roy C. Smith, a professor of management at New York University's Leonard N. Stern School of Business. Smith says that Weill's statement amounts to an admission on a "litany of sins," including encouraging a banking industry structure that precipitated hundreds of billions in bailouts, the largest regulatory overhaul since the Great Depression and a negative public image.

In Citigroup's case, the nation's third largest lender narrowly survived the crisis, taking $45 billion in taxpayer bailout funds and its shares remain over 90% below 2007 levels as it tries to unwind a balance sheet that swelled to roughly $2 trillion in assets. Bank of America (BAC), the nation's second largest bank received a similar sized crisis-time bailout and its shares stand at a mere 85% below 2007 levels.

Still, Smith - a former general partner at Goldman Sachs (GS) -- says that Weill's rationale fails to mention many crucial reasons for a universal bank breakup.

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