WASHINGTON — Former Citigroup chief executive Sandy Weill's call for the reinstatement of a clear separation of commercial and investment banking reverberated loudly through the nation's capital Wednesday.
At a House hearing with Treasury Secretary Timothy Geithner, both Democratic and Republican lawmakers pounced on the comments, suggesting a new openness to the argument that the nation's largest banks should be broken up.
"It is absolutely huge that Sandy Weill has called for the break-up of the big banks," said Rep. Carolyn Maloney, D-N.Y., who represents much of Manhattan and voted for the 1999 repeal of the Depression-era Glass-Steagall Act.
Rep. Walter Jones, R-N.C., who had previously expressed regret over his earlier support repealing the law, said Wednesday that it was one of the worst votes he has made in 18 years in Congress. "Isn't it time to have a discussion and a debate about the reinstatement of Glass-Steagall?" he asked Geithner.
Geithner said that he had not yet heard Weill's comments, which were made on CNBC's morning news show "Squawk Box." And he argued that the Dodd-Frank Act provides strong disincentives — particularly in the form of tougher capital standards — against banks growing larger.
"All we can do is to try and protect the economy from the failures banks will inevitably make," Geithner said during a hearing that was otherwise dominated by the burgeoning scandal over banks' manipulation of the benchmark interest rate known as Libor.
"Our job is not to prevent them from making mistakes. We can try to do that. Our job is to make sure that when they make mistakes, they don't imperil the broader American economy and the safety of people's savings and make it harder for businesses to borrow."
But Geithner was less firm in his opposition to separating commercial banking from investment banking than he was during 2009 congressional testimony, when he said: "I would not support reinstating Glass-Steagall."
On Wednesday, the Treasury secretary argued that the Dodd-Frank reforms should be given a chance to work, but he also said: "Should we keep looking at what more we could do to make this system safer? Absolutely. And I expect Congress to continue to do that."
The stir began earlier in the morning, when Weill said, "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."
"I'm 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, they're not subject to a Volcker rule, they can make some mistakes, but they'll have everything that clears with each other every single night so they can be mark-to-market," he said.
Weill's comments were particularly striking because the former Citigroup CEO was one of the main catalysts for the repeal of the law that separated commercial banking from investment banking. In 1998, Citicorp and Travelers Group merged to form Citigroup, and the company would have been forced to undertake massive divestitures had Glass-Steagall not been repealed.
The remarks touched off a torrid discussion Wednesday on the Internet, where by mid-afternoon, "Sandy Weill" was Twitter's second-highest-trending topic. At Salon.com, a writer likened Weill's change of heart to Ghengis Khan making a deathbed conversion to pacifism.
With his remarks, Weill joined former Citigroup Chairman John Reed, who in 2009 reversed his view on Glass-Steagall. (To see other prominent voices that are calling for big-bank breakups, click here.)
For longtime supporters of breaking up the big banks — including Democratic Sen. Sherrod Brown, who is proposing legislation that would impose strict limits on bank deposits, liabilities and leverage — Weill's comments were taken as vindication.
"Sanford Weill is one of many banking industry experts who have observed that too-big-to-fail is often too big to manage," Brown said in a statement.
"Allowing Wall Street megabanks to grow so large and over-leveraged that their downfall would send ripples throughout our entire economy isn't fair to taxpayers, and it isn't fair to mid-sized and community banks who don't enjoy the implicit guarantee from the Treasury Department that comes with too-big-to-fail status."
Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., who has also been a leading voice for breaking up the big banks, said Wednesday that Citigroup is a poster child for the too-big-to-fail problem.
"So it is truly ironic, but obviously I agree with him," Bair told CNBC, referring to Weill's statements. "I think these banks are too big to manage centrally. They're too big to regulate, and they don't produce good shareholder value, either. There's a lot of value to be had if they were broken up."
Bair's comments were hardly a surprise, but the apparent shifts in opinion on Capitol Hill were potentially more significant. Supporters of Lyndon LaRouche have recently been distributing pamphlets outside the Capitol calling for the return of Glass-Steagall — a symbol of how politically marginal the debate about breaking up the big banks has been until now.
Beyond Weill's comments, there are political conditions that could prompt lawmakers to take another look at Glass-Steagall. Legislators from both parties have expressed frustration with the unwieldiness of the Volcker Rule, which sought to use another means to achieve essentially the same goal as the 1930s-era regulation, as well as the complex proposal by regulators to implement the measure.
It remains to be seen whether Weill's remarks will be more than a one-day story. But it seemed meaningful when Maloney asked Geithner to provide a written analysis of how the financial crisis would have played out differently if Glass-Steagall had still been in effect.
Rep. Bill Huizenga, a first-term Republican from Michigan, also sounded intrigued by the idea of reinstating Glass-Steagall, though he stopped short of offering his own opinion.
Huizenga spoke for many cable-news viewers when he said, "I was watching 'Squawk Box' this morning when Sandy Weill made his comments, then saw the crawler about Glass-Steagall, and I was like, 'OK, did he really specifically say that?'"