Sandy Weill Regrets Breaking Glass

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By DAVID REILLY

Even for bankers, who love taking things apart and putting them back together, Sanford Weill's U-turn is striking.

The former Citigroup C +2.18% chairman now believes it was a mistake to scrap the Glass-Steagall separation of commercial and investment banking, once seen as one of his crowning achievements. As stunning as this admission was, he was only catching up with what markets already think.

Former Citigroup Chairman and CEO Sandy Weill turned the financial world on its ear when he said it's time to split up investment banking from regular banking. WSJ's David Reilly visits Mean Street to explain. Photo: Getty Images.

While too-big-to-fail banks may enjoy lots of supposed advantages, outsize market valuations aren't one of them. The three, big U.S. banks with substantial commercial and investment banking operations—J.P. Morgan Chase,JPM +1.27% Citigroup and Bank of America BAC +0.43% —trade at a substantial discount to many, far smaller peers.

Citi and BofA trade at prices that are equal to only around half their tangible book value, or net worth. J.P. Morgan just trades at tangible book.

Meanwhile, a group of about 50 regional banks with market values between $1 billion and $25 billion trade at an average of 1.5 times tangible book, according to data from FactSet. And even bigger banks that lack substantial investment-banking and trading operations trade at a premium. U.S. Bancorp, USB -0.52% for example, trades at 2.6 times tangible book, while Wells Fargo WFC -0.21% is at about 1.8 times.

The higher valuations afforded to more focused banks reflect a variety of factors. The biggest, most interconnected banks will be forced to maintain higher levels of capital, under new regulatory regimes. New rules also look set to make trading operations less profitable. And bigger banks are being assessed a sort of conglomerate penalty for their complexity and the inherent risks that poses.

Given this, any move to resurrect Glass-Steagall potentially could unlock value. J.P. Morgan's consumer and commercial bank businesses, for example, likely would trade at a multiple nearer to that of Wells Fargo. If the investment-banking segment didn't trade too far below tangible book value, such a split might make sense.

Most importantly, a restructuring of the biggest banks would reduce banking concentration and the risks it poses to the financial system and taxpayers.

The biggest banks, for their part, have insisted there are advantages to having integrated businesses that reach across the banking spectrum and the world, both for customers and their own shareholders. They also claim that any move to break up big, U.S. banks would simply leave an opening for foreign banking behemoths, which often enjoy greater government support.

In any case, calls to break up the biggest banks aren't likely to lead to any quick legislative action. With presidential and congressional elections looming, Washington isn't about to tackle such a politically fraught topic. Nor is it clear that Glass-Steagall would be a silver bullet—any reincarnation would require new regulatory structures to insure that new stand-alone investment banks don't themselves become a threat to financial stability.

But Mr. Weill's change of heart, no matter how late in the day, should prompt soul searching among bank board members and executives. It may also prod shareholders to become more aggressive in seeking change.

That would be good for markets and taxpayers. It might even benefit banks. After all, better for them to change in an attempt to become more attractive investments, than to risk having change thrust upon them.

Write to David Reilly at david.reilly@wsj.com