Weill’s About-Face: Break Up the Banks!

The architect of too-big-to-fail changes his tune

Now he tells us!

Sandy Weill, the former CEO and chairman of Citigroup (NYSE:C) who invented the one-stop shopping financial supermarket idea of too-big-to-fail banks, says we should break them up.

That’s right: The man who spearheaded the death of Glass-Steagall — the Depression-era law that separated commercial banking from investment banking and insurance underwriting — now thinks we should go back in time and undo all these risky combinations.

It’s like Nixon goes to China.

Weill didn’t apologize for engineering a world of systemically risky banks when he appeared on CNBC’s Squawk Box Wednesday morning, insisting that the unholy alliances were “right for that time.”

Sure, whatever.

The important part is Weill has changed his tune — and that’s giving proponents of the Volcker Rule, which forbids banks from making speculative bets with customers’ tax-payer insured deposits, a marquee-name ally.

“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, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Weill said.

No financial institution should be so big that its collapse brings down the global financial system. Yet here we are four years after the crisis, and too-big-to-fail banks are bigger than ever. The crisis led JPMorgan Chase (NYSE:JPM) to scoop up Washington Mutual and Bear Stearns. Bank of America (NYSE:BAC) grabbed Merrill Lynch and Countrywide (much to the bank’s regret). Wells Fargo (NYSE:WFC) consumed Wachovia.

Yes, there actually are fewer, bigger players today. And more risk concentrated in a smaller number of institutions is the opposite of doing away with too-big-to-fail.

That someone of Weill’s stature should now side with the Volcker Rulers and the break-up-the-banks crowd is a big deal.

Whether Weill and the rest of them can put the genie back in the bottle very much remains to be seen.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

The opinions contained in this column are solely those of the writer.

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