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CNBC EXCERPT: SANFORD WEILL, FORMER CITIGROUP CHAIRMAN & CEO SPEAKS WITH CNBC’S “SQUAWK BOX” TODAY

Steffanie Marchese
Wednesday, 25 Jul 2012 | 9:55 AM ET

WHEN: Today, Wednesday, July 25, 2012

WHERE: CNBC’s “Squawk Box

Following is an excerpt from the unofficial transcript of a CNBC interview with former Citigroup Chairman and CEO Sanford Weill today on CNBC’s “Squawk Box.”

Following are links to video of the interview on CNBC.com:

Wall Street Legend Weill: Breaking Up Big Banks

http://video.cnbc.com/gallery/?video=3000104457&play=1

Weill: Time to Separate Investment Banks

http://video.cnbc.com/gallery/?video=3000105218&play=1

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WEILL: Thank you, Becky. Good to be here.

QUICK: There are so many things that we want to talk to you about. There are people that want to get your world view. There are so many other things going with LIBOR and Europe…In looking back, do you think the mega-banks played a role in terms of too big to fail for what happened with the financial crisis or not.

WEILL: Let me first start by saying that I think that the two decades before the problem, the big banks really led the growth of the world and creating capital markets in all these countries converting communist countries to the capitalist system.

Really helping over a billion people come from abject poverty to the middle class as defined by parts of the world.

The banking system is really very, very important. I think that the problem that was created was created by too much concentration in investments in the banking system, way too much leverage, very little transparency with lots of off balance sheet things that didn’t really count. And I think that a lot of those things have to change. But even after the problem, There is really no other country in the world be the leader of the world yet.

So It really falls on the United States to still be the leader. And if we are going to be the leader, we have to have a financial system that can help us be the leader and that is not happening right now.

QUICK: The Dodd Frank Regulations, only about a third of those rules have been implement

WEILL: Let me talk about that. If we had a leverage of our financial companies of something 15 times and 18 times rather than if you added off balance sheet than Lehman Brothers might have been 50 times. It might have been a very difference. I think there should be transparency and nothing off the balance sheet of a bank or any financial institution. If a bank or any financial institution wants to do something, they should have it on the balance sheet.

If they want a car, they can call it special purpose vehicles or whatever they want to call, but it should be shown. In derivatives, we should have an exchange where they trade and can be marked to market so that you don’t have a problem that builds up over multiple years and all of a sudden you see a big collapse.

If it was marked to market every single day, then you would be able to protect the balance sheets of the different companies. Where I think mostly is that there is such a feeling among people, regulators, among the political system all over the world against the banking system. And I don’t think that is going to change so soon.

What I think we should probably do is go and split up investment banking from banking and have banks be deposit takers, have banks make commercial and real estate loans. And have banks do something that will not risk tax payer dollars. And that is not going to be something that will not be too big to fail. If banks want to hedge what they are doing in their investments, let them do it in a way that is marked to market so that they are never going to be hit. Let’s have a creative investment banking system like we have always had, so that the financial industry can once again attract the best and the brightest like they are doing in Silicon Valley like they are doing in engineering.

So that we can lead in the innovation and entrepreneurship that is necessary, we can’t have a world where it is impossible to make a mistake. If you make a mistake, you are really a bad person, because we do that we aren’t going to have a world where anything happens.

QUICK: That’s a pretty radical idea though. The idea of breaking up the investment banks and the banks. Are you suggesting going back and really breaking these companies up?

WEILL: That is exactly what I am suggesting. I want to see the United States be the leader, and I really believe in our country. And we are not going to be a leader if we keep on trashing our institutions.

SORKIN: So the question becomes Glass Steagall, You are almost referring to bringing back Glass-Steagall in some respects.

WEILL: Glass Steagall went a long time before ahh. Well Glass-Steagall is related to banks and investment banks and was done away with in the mid 80s. The only part of Glass-Stegall that we cared about had to do with insurance underwriting and that is what went away with Glass-Steagall.

WEILL: What I am suggesting that they be broken up so that the taxpayer will never be at risk so that the depositors won’t be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading and that is subject to Volcker…They can make some mistakes and they will have everything that clears with each single night so that they can be marked to market. And they would have the same kind of leverage.

QUICK: You sound tougher than Volcker

SORKIN: This much tougher than Volcker

WEILL: I don’t know whether it is tougher or not. I want to see us be a leader and what we are doing now is not going to make the united states a leader

SORKIN: What does that say about the financial market model. When you go back and think about the model that you developed and now it sounds like you are prepared to break it up.

WEILL: I think the world changes and the world that we live in is different than the one that we lived in 10 years ago. And I think one has to think about what is this world about. There are a lot of things in silicon valley for the few that end up working. There is no other place in the world where you are seeing in the creativity that you are seeing in the United States today. And I would like to see it back in the financial business and It is not happening.

QUICK: This isn’t necessarily what you think is the best solution, but the only real solution because of the perception that voters and regulators have for the big banks at this point, you think that is what’s hampering things right now?

WEILL: But I think that’s real and somewhat justified but it’s real it’s a fact and therefore I think we should go have a system where they can be separated so they can both do their own things and nobody can say that taxpayers at worse they’ve got to bail them out. I love the title of your book, I love reading your book, but I think too big to fail can be handled.

SORKIN: Have you spoken to for example, a Jamie Dimon, or Vikram Pandit, about this idea?

WEILL: No

SORKIN: What do you think the reaction would be?

WEILL: I don’t know, you’ll find out

SORKIN: We can try to find out later today. I have to say I’m blown away

QUICK: I am too, this is not what I expected to hear coming out but this is really what you think is the best way to deal with this situation

WEILL: I care about America, and I care about the world and we have such a great chance. When you see what people are doing in Latin America and the Middle East and Africa and Asia, it’s really exciting. There are problems in Europe there are problems here. Lots of what’s happening here is because people don’t know how to plan and companies aren’t spending any money. They are spending only what they have to because they don’t know what the rules of the game are.

QUICK: How did this change under this scenario, and I guess the push back you would hear is at the very beginning of this conversation. You made out all the great things that the big banks were able to do and the financing that they were able to bring to third world countries to consumers that had never had access to that before. How would that change under this new scenario where you see the banks being split up?

WEILL: Well I think the only thing different would be that investment banks would not be deposit takers, they would not have the ability to be bailed out by the central bank. Which they never really did, the system was so intertwined that the institutions that really got in trouble that created a lot of the problem were not banks.

SORKIN: So you’ve seen a lot of the banks obviously over the past two or three years post crisis push back on a lot of the regulation. You’ve seen a lot of CEO’s including Jamie Dimon who you’ve worked with suggest that banks are not too big to fail that we actually need size and scale to be competitive globally. That’s the argument that’s been made. You say that’s wrong.

WEILL: No I think we can have size and scale but it doesn’t need to be connected to a deposit taking institution

SORKIN: When I say I’m speechless, I’m speechless.

WEILL: That’s the first time I’ve ever heard you speechless

QUICK: We need to get dekos at the bottom of the screen saying breaking news because this is very different than what we’ve maybe expected to hear from you. How long have you been thinking this through?

WEILL: For a long time, and I speak to a lot of people in the business and it is really sad what is happening and it’s sad for young people and this was an industry that attracted a lot of really terrific people, mistakes were made but this industry is very important to growth and very important to turning this world around, and that’s good for everybody.

QUICK: What do you think about Dodd Frank, it does not go nearly as far as what you’ve talked about but again there are still two-thirds of the rules there that have to be implemented.

WEILL: There’s too many pages to read I mean I’m saying what I think we can do in two or three pages. It would be different, it would be much more free for the investment banking side of it and it would be much different or the way it used to be 25 years ago for the banking side of it.

SORKIN: What would you do about the investment banking side of it. For firms like Morgan Stanley or Goldman Sachs or if you were to hive JPMorgan off into investment banking and Citigroup in the same kind of way, ultimately are those investment banks themselves going to have too much risk in them and how would you manage that?

WEILL: Well I think you manage that by managing leverage, you manage transparency, you manage understanding markets and concentration and you manage it by basically by having a balance sheet that is visible that people know what’s there, they know what the assets are, you know how to mark assets as far as when your figuring your leverage by what is marketable, where real estate deals that aren’t marketable would we charge them a different way as far as determining the capital to determine a different leverage.

SORKIN: What was the turning point

WEILL: I think the turning point is from what is happening I see us forfeiting our position of leadership in the world

SORKIN: But did this come to you in 2008, 2009, was there a conversation you had with someone, because this is a true revolution.

WEILL: Change. You know I think it is something I’ve been thinking about a lot over the last year and I wanted to really get my thoughts together before I said anything. But I think good things are simple and I think what I’m saying is very simple. You don’t need a thousand pages to figure out what one’s leverage is or how you would evaluate assets to determine what is one side of that equation.

QUICK: And by the way we need breaking news dekos across the bottom for those who aren’t listening at home, listen up if you haven’t been listening so far, this is important.

SORKIN: Just review exactly what you want to see happen to the big banks.

WEILL: I would like to see the banks become simply deposit taking institution that makes loans to individuals that makes loans to small business that makes loans to businesses, that has to operate within a leverage ratio of twelve or fifteen times the equity that it has, that has to have everything on its balance sheet,. There’s no such definition or word that’s off balance sheet. And if it’s going to hedge it’s positions it hedges it in a way that position can be marked to market and cleared through and exchange so it’s not something you can do twenty times what they transaction is which ended up happening with a lot of these derivatives, somebody was hedging one thing and we ended up with a hundred times that kind of hedge on a single transaction.

SORKIN: And the idea is to truly separate, I mean you are talking about two separate institutions.

WEILL: Take the investment banks out of that, they can invest their money how they like.

SORKIN: And are you spinning them off completely?

WEILL: Completely-- Completely. They would be entities on their own like they were 25 years.

SORKIN: When the currency … of most wall street banks today say that you need to have the integrated model that you developed and talked about for so many years and said this is what the client wants and for us to compete globally. We have banks in Europe and Asia that are huge and they are so now tightly integrated that all of these products and services. That’s no longer …That is no longer

WEILL: Our world is not going to let this happen. Our world hates bankers. Our world says you can’t make a mistake. If you make a mistake, the taxpayers are going to come down on you. I mean it is not going to happen and I just don’t like to see it not happening. I don’t like to see us forfeiting our position of leadership in an industry that we created and everyone has copied our model of capital markets and being able to sell debt. Everything.

SORKIN: If you are CEO today running one of these big institutions, do you think it would more profitable to do what you just said.

WEILL: Much.

QUICK: What about for the banks that are left? The banking institutions themselves. You talk about the standard old vanilla loans. That is not a hugely profitable business.

WEILL: this is what all the regional banks do and everyone is saying buy the regional banks. I look at that and say that they are just going to be a bigger regional bank.

QUICK: Will the United States still be able to compete with countries that still have these major banks that are kept together?

WEILL: Absolutely. Definitely. The capital markets are adequate do that over time and with confidence coming back again. And we should attract the bright people back to this industry. I think the United States wouldn’t just compete, they would be the leader. You have to be able to make mistakes and you have to be entrepreneurial. Our country was built with immigrants that were entrepreneurial. People have to have a chance.

Look at what you all have done, look at me. The 1%. I think 99% of the 1% were part of the 1%. And that is a good thing to look forward to.

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