Don't Force Banks Into 'Draconian' Breakups: Whitney

US banks are already starting to separate commercial and investment banking operations, so there's no need for the radical breakup suggested by former Citigroup chairman Sandy Weill, banking analyst Meredith Whitney told CNBC Wednesday.

Meredith Whitney
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Meredith Whitney

“You don’t have to have a draconian move to split up the banks,” Whitney, founder of the Meredith Whitney Advisory Group said on “Closing Bell.”

Earlier Wednesday, Weill told CNBCthat after championing "financial supermarkets" in the 1990s, he now thinks it's time to break up the big banks to prevent a repeat of the huge taxpayer bailouts during the 2008 financial crisis.

Though he didn't say so, Weill essentially called for the return of the Glass–Steagall Act, the Depression-era law that separated investment and commercial banking but that Congress rescinded in 1999.

“It’s nice to say the big banks should be broken up (but) it’s very expensive to do so,” Whitney said. “That’s why you’re seeing the big banks trade at such steep discounts.”

She added that the end of Glass-Steagall had some disadvantages for banks as well.

“One absolute thing the fall of Glass-Steagall did was destroy pricing,” Whitney said. "Pricing on mortgages to credit cards was eviscerated with the idea the banks could make money on the other side through securitizing their products."

The pricing model for financial services needs to be re-established, she said.

“What the market is saying is that the regionals that have less complex models are worth more than the heavily complex models because it will take years to downsize these institutions,” Whitney noted.

Whitney pointed out that the more profitable business like cash management and asset management are such a small part of the big banks. Instead, most of the infrastructure has been built up in the capital markets business to support what has become a broken business.

“You should always be in profitable making businesses not loss-leading businesses,” Whitney said. “If you’re not making money get out of the business.”

Whitney isn’t a strong buyer of the banks here.

“The group has absolutely no momentum,” she said. “You’re not getting paid to wait because the dividends are only marginally attractive and there is still risk.”

The big banks need to be completely reconstructed and they need to get back to basics and profitability, Whitney said. “Then you’ll see momentum.”