NEW YORK ( TheStreet)-- Former Citigroup chief Sandy Weill may effectively want to undo the 1999 Gramm Leach Bliley Act, which allowed Citigroup and other banks to merge with securities dealers and insurance companies, but former Senate Banking Committee Chairman Phil Gramm remains firmly opposed to changing the law that bears his name. Gramm argues banks such as Citigroup imploded because of their outsized exposure to bonds stuffed with individual mortgages--which they were allowed to hold before GLB was passed. "He has a right to change his mind," Gramm says of Weill, "but the financial crisis was caused by financial institutions holding mortgage-backed securities, which even by his own words banks could do
before the crisis ." Weill told CNBC Wednesday that "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." Gramm says investment banking (or securities dealing) remained separate from banking after the passage of GLB in 1999 in the sense that banks and insurers cannot use their capital cushions to bolster a securities affiliate. "It's important to remind people that Gramm Leach Bliley didn't repeal Glass Steagall," said Gramm of the Depression-era law that separated banks, insurers and securities dealers, "it simply allowed banks, securities companies and insurance companies to affiliate through a new structure it created called a financial services holding company. In that structure a bank cannot share capital with a security affiliate. If they have problems in their security affiliate they cant take capital out of the bank to try to deal with it and the security affiliate does not in any way endanger the depositor and therefore the taxpayer. So to the extent that Sandy Weill is saying that banks shouldn't be in the securities business, the law doesn't allow them to be in the securities business." Gramm argues the bailout of the banking system wasn't about bailing out the largest banks. He says that some banks, including JPMorgan Chase ( JPM) and Wells Fargo ( WFC), were forced to take bailouts though they didn't need them and didn't want them.
"The myth of the bailout is that the government bailed out banks that were too big to fail. If that were true they would have bailed out seven banks. They bailed out 800 banks. Why? Because they were trying to inject liquidity into the system." Gramm says he pushed for GLB because he wanted to "promote competition--to create more products and to produce lower prices for consumers and I think we achieved that objective." Proof of GLB's success, according to Gramm, can be found in lower costs for companies looking to raise capital, since not just securities dealers but also banks can compete for this business. Gramm, who spent 10 years at UBS ( UBS) after leaving Congress and is now a scholar at the American Enterprise Institute, is known for his deep-seated belief in small government. He even believes bailing out AIG was a step too far. "I would argue that they didn't have to bail out AIG and that they shouldn't have," he says, adding that. "In all fairness, I wasn't there. I wasn't facing the heat of the moment and maybe I would have felt differently had I been." Weill and Gramm were powerful allies as they worked for the passage of GLB. According to Weill's memoir "The Real Deal: My Life in Business and Philanthropy," Gramm once joked to Weill that the law should have been called The Weill Gramm Leach Bliley Act. Both appeared in a Time Magazine list of 25 People to Blame for the Financial Crisis. -- Written by Dan Freed in New York. Follow this writer on Twitter.