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Lawmakers push bill to break up too-big-to-fail banks

April 09, 2013|By Jim Puzzanghera
  • Rep. Brad Sherman (D-Sherman Oaks) has long sought tougher financial rules for the nation's largest banks.
Rep. Brad Sherman (D-Sherman Oaks) has long sought tougher financial rules… (Lawrence K. Ho / Los Angeles…)

WASHINGTON -- Two lawmakers on Tuesday introduced legislation to break up banks that are deemed too big to fail, arguing taxpayers should not be faced again with bailing out firms that have become even larger since the financial crisis.

"We have a situation now where Wall Street banks are not only too big to fail, they are too big to jail," said Sen. Bernie Sanders (I-Vt.), noting that Atty. Gen. Eric H. Holder Jr. recently said it was difficult to bring criminal charges in cases involving gigantic financial firms because of the risk to the economy.

Sanders and Rep. Brad Sherman (D-Sherman Oaks) are pushing their "Too Big to Fail, Too Big to Exist Act" to eliminate the potential for future bailouts.

The bill would give the Treasury Department 90 days to identify any companies -- including banks, hedge funds and other firms -- whose "failure would have a catastrophic effect on the stability of the financial system or the United States economy without substantial government assistance."

Treasury then would be required to break up those companies.

"This is not a radical solution," Sherman said. "In the world of corporate finance, corporations often divide themselves and spin off a subsidiary."

Sanders and Sherman have been pushing the idea for several years and were unable to get such a provision in the 2010 Dodd-Frank overhaul of financial rules.

The Financial Services Roundtable, which represents the largest banks, said it opposes the legislation.

"If a bank is going to fail, it should be allowed to fail," said Scott Talbott, the group's senior vice president for public policy. "We don’t think the government should bail out a failing bank."

But as the largest banks have gotten bigger since the crisis and Wall Street profits have soared, Sanders and Sherman said the risk of future bailouts remains. And they said there is growing momentum for addressing the too-big-to-fail issue.

The heads of the Federal Reserve Banks of St. Louis and Dallas have called for breaking up the largest banks. And Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) are working on legislation to force large banks to hold more capital in case they run into financial problems so taxpayers don't have to bail them out.

Although there is a lot of frustation in Washington with Wall Street and lingering bitterness from the 2008 financial industry bailouts, Congress still appears a long way from embracing a move to break up mega-banks.

The Obama administration argues that Dodd-Frank gives regulators new tools to seize and shut down financial firms on the brink of failure if their collapse would threaten the economy.

But Sanders and Sherman said those powers do not end the threat of future bailouts. They argued that the largest banks pay less to borrow money because creditors believe the U.S. government would step in again if bankruptcy loomed.

"We need a free-market financial system, one where capital is allocated based on the risks shown on the balance sheet, not based on who’s got the clout in Washington to get a bailout," Sherman said.

He and Sanders realize their legislation faces an uphill fight but said they would keep pushing it.

"It’s not going to happen tomorrow, but I think momentum is with us," Sanders said.

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