Break Up Big Banks: Sandy Weill (Update 2)

Updated with additional comments from Sandy Weill and comments on the complexity of large bank holding companies from the Federal Reserve Bank of New York.

NEW YORK ( TheStreet) -- Former Citigroup ( C) Chairman Sanford "Sandy" Weill said on Wednesday that it's time for the United States to "go and split up investment banking from banking."

In an interview on CNBC, Weill -- who led the 1998 merger of Travelers Group and Citicorp to form Citigroup -- said that the financial crisis "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."

"What we should probably do," Weill said, "is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail, and if they want to hedge what they're doing in their investments, let them do it in a way where it can be marked to market so they're never going to be hit."

Weill then said "let's have a creative investment banking system like we've always had, where the financial industry can again attract the best and the brightest young people like they do in silicon valley, like they're doing in engineering, so that we can lead the innovation that's necessary and the entrepreneurship that's necessary.

"We can't have a world where it's impossible to make a mistake... because if we do that, we're not going to have a world where anything happens right."

When pressed for clarification on whether the largest banks really should be broken up, Weill said "I am suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won't be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading... not subject to a Volcker rule." Continuing on the theme of separate investment banks, Weill said "they can be creative, they can make some mistakes, they'll have everything clearing with each other every single night so that they can be marked to market."

When asked about the "financial supermarket" business model touted years back by Citigroup and Bank of America, Weill said "the world that we live in now is different from the world we lived in 10 years ago."

When discussing the Dodd Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- Weill said "it's too many pages to read," and that "what I am saying you can do in two or three pages." Under Weill's proposal, "It would be much more free for the investment banking side of it... and the way it used to be 25 years ago for the banking side of it."

Weill said that "good things are simple... you don't need a thousand pages to figure out what a bank's leverage is or how you would evaluate assets."

"I would like to see banks become simply a deposit taking institution that makes loans to individuals... that makes loans to businesses... that has to operate within a leverage ratio of 12-15 times the equity that it has, that has to have everything on its balance sheet, with no such definition or word as 'off-balance sheet,' and that if it's going to hedge its positions, it hedges in a way that the positions can be marked-to-market and cleared through an exchange."

Investment banks could then "be entities on their own, like they were 25 years ago," and "invest their money how they like.

"I don't like to see us forfeiting our position of leadership in an industry that we created. Everybody has copied our model of capital markets, of being able to sell debt, everything."

"Weill said "there is no other place in the world where you are seeing the creativity you see in the United States today, and I would like to see that in the financial business."

A quick look at stock price valuations for the nation's three largest bank holding companies shows that investors don't trust the group, and that there is potential to unlock value if the companies are broken up:

Shares of JPMorgan Chase ( JPM) closed at $34.73 Tuesday, returning 7% year-to-date, following a 20% decline during 2011. The shares trade just above tangible book value, according to Thomson Reuters Bank Insight, and for seven times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.64. Based on a 30-cent quarterly payout, JPMorgan's shares have an attractive dividend yield of 3.46%.

Shares of Bank of America ( BAC) closed t at $7.04 Tuesday, returning 27% year-to-date, after dropping 58% during 2011. The shares trade for just over half their reported June 30 tangible book value of $13.22, and for less than eight times the consensus 2013 EPS estimate of 93 cents. The consensus 2012 EPS estimate is 56 cents.

Citigroup closed at $25.24 Tuesday, down 4% year-to-date, following a 44% decline during 2011. The shares trade for just under half their reported June 30 tangible book value of $51.81, and for less than six times the consensus 2013 EPS estimate of $4.54. The consensus 2012 EPS estimate is $4.09.

The Federal Reserve Bank of New York's July economic policy review included a report on bank holding companies, or BHCs, highlighting a trend of "significant broadening in the types of commercial activities engaged in by BHCs and a shift in revenue generation toward fee income, trading, and other noninterest activities."

The New York Fed provided a striking statistic illustrated the growing importance of bank holding companies, saying "U.S. BHCs as a group (inclusive of firms whose ultimate parent is a foreign banking organization) control well over $15 trillion in total assets, representing a fivefold increase since 1991." In comparison, "nominal GDP increased by only around 150 percent over the same period."

Further illustrating the incredible complexity of the largest U.S. bank holding companies, the Federal Reserve Bank of New York said that "today, the four most complex firms," measured by the number of separate legal entities included within the holding company structure, "each have more than 2,000 subsidiaries, and two have more than 3,000 subsidiaries," while "in contrast, only one firm exceeded 500 subsidiaries in 1991."

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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