Sandy Weill has a lot of convincing to do.
The former Citigroup Inc CEO, who was in many ways the architect of the "too big to fail" giant bank system, dropped a bombshell on Wall Street on Wednesday by proposing that universal banks should be broken up because they are too big and complex to manage.
But the idea is hardly resonating with top bankers and dealmakers of the past 20 years.
"I don't buy it," said William Harrison, who was succeeded by Jamie Dimon as chairman and CEO of JPMorgan Chase & Co (JPM.N). "It gets back to management and risk-taking, and you can screw that up at a small bank or a large bank."
Harrison, a Weill contemporary who was instrumental in building JPMorgan into the largest U.S. bank, said in an interview on Thursday that he would hate to see the anger toward bankers lead to a breakup of big banks and the efficiencies they bring to the U.S. financial system.
Other Wall Street sources said the idea is also not new.
During the financial crisis, for example, U.S. regulators asked Citigroup (C.N) CEO to do an analysis about whether it would make sense to separate its commercial and investment banking operations, a source familiar with the situation said.
But consulting firm Bain & Co, which was hired by Citigroup to do a study, concluded that tax considerations made a breakup inefficient, the source said.
The report, which was kept hush-hush due to the sensitivity of the matter, was not widely circulated even internally at the bank. It couldn't be learned what exactly the tax implications would have been.
Citigroup declined to comment. A Bain spokeswoman and Weill did not respond to requests for comment in time for publication.
Since the crisis many other major U.S. banks have also studied whether breaking up would be a good idea, Wall Street sources said, but have decided to remain in one piece.
Nevertheless, the about-face by Weill has sparked fresh debate about whether big banks should indeed be broken up. A breakup of any of the top Wall Street banks could have far-reaching consequences for investors, corporations, capital markets and consumers.
"Most big bank executives are not in favor of breaking up, and in fact are in violent opposition to it," said Robert Bostrum, a partner at the law firm SNR Denton who was general counsel of housing finance giant Freddie Mac FMCC.OB from 2006 until last year.
"I'm not personally convinced that size equals trouble or that size plus activities equals trouble," Bostrum added. "The financial crisis was a 200-year event in the making that would have happened regardless of how big the banks were."
BENEFITS OF BEING BIG
Several Wall Street executives said being big brings many advantages, and pointed to the benefit of having the kind of diverse revenue streams that allowed JPMorgan to absorb major losses from bad bets in its trading business last quarter while still earning money overall.
"Having lived through the 80s and 90s, the reason there was this consolidation in the industry was really because the bigger your balance sheet, the more business you could do," said Peter Vinella, a director at consulting firm Berkeley Research Group.
Vinella, who has helped develop business strategy plans for giant banks since the financial crisis, worked for Dimon and sat in on meetings with Weill when they were all at Citigroup.
Wall Street executives and advisers argued that U.S. banks have to be big and diverse to compete with large European, Asian and Latin American competitors.
Clients also like the wide range of talent and services that they can bring to the table.
"People around the world, like me, for example, need the services of these big integrated investment banks," said the founder of a major private equity firm. "If you try to go backwards, commercial customers will have less access to less good service, with less good prices."
'UNSCRAMBLING THE EGG'
Not everyone agrees. Some experts say a breakup makes sense, especially when considering the values investors are assigning to financial supermarkets compared with rivals that have largely stuck to their knitting.
Shares of Citigroup, Bank of America Corp (BAC.N) and JPMorgan trade at less than 8 times 12-month earnings, whereas Wells Fargo & Co (WFC.N) and US Bancorp (USB.N) trade at 11 and 12 times earnings, respectively.
Mike Mayo, a bank analyst with CLSA, says he believes Morgan Stanley (MS.N) shares would be worth $32 apiece if the bank were split up into three standalone businesses in securities, wealth management and asset management. Morgan Stanley shares have been trading only around $13, less than half of its tangible book value per share at June 30.
Executives and bankers are stumped by certain questions in such a breakup analysis. For instance, how would a standalone investment bank or its clients be in a better position without access to funding that comes from being part of a diversified company? And what about the costs of untangling integrated systems, some of which were only melded together at a great expense in the past few years?
One former top banking executive, who declined to be named, said "unscrambling the egg" is one of the main difficulties in a breakup scenario - especially when functions like lending to large companies, treasury management and underwriting debt are all interlinked.
Richard Kovacevich, who retired as CEO of Wells Fargo at the end of 2009, told Reuters that he also did not agree with Weill's recommendation, made on Wednesday in a CNBC interview.
"There is this conventional wisdom that big is bad or risky," he said. "I don't think there is any evidence that that is the case. Banks fail mainly because of concentration of risk."
The idea advocated by Weill and other "too big to fail" critics would imply a return to a Depression-era rules known as Glass-Steagall, which separated investment banks from banks that took deposits and made traditional loans.
Peter Hagan, a director of Allied Irish Banks (ALBK.I) and former chairman of Merrill Lynch's U.S. banks, said the ability to trade securities helps a bank manage its own risk and provide risk management services to clients.
Instead of returning to Glass-Steagall, regulators could build in incentives for the industry to deconsolidate on its own and reduce risk. One idea could be to create incentives such as more attractive capital rules for smaller institutions, which could make them more profitable and encourage managements of large banks to break into smaller pieces, he said.
"The point is if you get them down to a reasonable size, where they are not too big to fail, you then have the ability to manage the situation if one of them gets somewhat out of line," Hagan said.
Some banks have been getting smaller. Citigroup, for example, has sold more than 60 businesses and $600 billion in assets since determining in 2009 that about 40 percent of its balance sheet was no longer necessary for its banking operation.
Many bankers say what is most likely to happen is that big banks will continue to shed some parts of their businesses and strengthen their balance sheets -- but that there is no 'big bang' series of break ups.
"We need a good discussion about how these institutions might be simplified and much better regulated," said Bill Isaac, former chairman of the Federal Deposit Insurance Corp, who is now global head of financial institutions at FTI Consulting and sits on the board of Fifth Third Bancorp (FITB.O). Isaac does not advocate a return to Glass-Steagall.
With clamor growing for a solution in the United States, some believe regulators may find a way to enforce even stricter rules.
"It's possible that the government would impose a Glass-Steagall type structure, especially if there's another blowup," said one Wall Street source.
But, he added, "I doubt any bank would voluntarily do it."
(Additional reporting by Dan Wilchins; Writing by Paritosh Bansal; Editing by Martin Howell and Muralikumar Anantharaman)