Wall Street Faces ‘Live Ammo’ as Congress Aims to Unravel Banks
Nov. 12 (Bloomberg) -- Seven Wall Street lobbyists trooped to Capitol
Hill on Nov. 9, hoping to convince Representative Paul Kanjorski’s
staff that his plan to dismantle large financial firms was a bad idea.
They walked out with a sobering conclusion, according to the accounts
of two attendees who requested anonymity because the meeting was
private. Not only was Kanjorski serious, he planned to offer the
legislation as early as next week -- and it just might pass.
Today marks a decade to the day that President Bill Clinton signed the
repeal of the Depression-era Glass-Steagall Act that split investment-
banking from lending and deposit-taking. The repeal allowed the
creation of Citigroup Inc., the financial colossus now propped up by
$45 billion in taxpayer rescue funds. Financial firms are scrambling
to prevent Congress from re- imposing the act.
“We’re playing with live ammo,” said Sam Geduldig, a lobbyist at
Clark Lytle & Geduldig who represents financial- services firms and
wasn’t at the Nov. 9 meeting. “The banking community is rightfully
concerned.”
The Financial Services Forum, which represents chief executive
officers of 18 of the largest financial firms and whose lobbyists
organized the visit to Kanjorski’s office, has scheduled or met about
a dozen lawmakers or aides with the House Financial Services Committee
in the last week. The U.S. needs big financial firms to compete
globally, said Rob Nichols, the group’s president.
‘Vocal and Persistent’ Presence
“Boeing and IBM can’t bank at the Silver Spring Community Bank,”
Nichols said. He said he’ll be “vocal and persistent in the halls
of Congress.”
Lawmakers are considering breakup proposals after public outcry over
the $700 billion rescue of firms including Citigroup, Bank of America
Corp. and American International Group Inc. Congress passed Glass-
Steagall in 1933 after speculative activities by many banks brought
the system close to collapse. One result: Morgan Stanley, the
investment bank split off from what is now JPMorgan Chase & Co.
“You don’t ever want to be in the situation again where something
is too big to fail,” Senate Banking Committee Chairman Christopher
Dodd told Bloomberg Television yesterday. The Connecticut Democrat,
who unveiled a regulatory overhaul proposal this week, said the
government should have the power to break apart large institutions
“as a very last resort.”
Edward Yingling, president of the American Bankers Association, which
represents banks of all sizes in their dealings with the U.S.
government, declined to comment on efforts to turn back pending
legislation.
Frank Supports Both
Representative Barney Frank, chairman of the House Financial Services
Committee, has proposed giving the Federal Reserve authority to force
holding companies whose size threatens financial stability to sell
assets or halt certain activities. Representative Ed Perlmutter, a
Colorado Democrat, wants to amend Frank’s bill so that the Fed could
impose Glass- Steagall on a case-by-case basis, said his spokeswoman,
Leslie Oliver.
Kanjorski, a member of Frank’s panel and chairman of its capital
markets subcommittee, would go further by allowing the U.S. to
dismantle any large firm whose size and risk-taking threaten the
financial system.
Frank supports both the Kanjorski and Perlmutter plans. “I believe
both will be adopted,” he said on Nov. 3.
John Reed’s Apology
Senator Bernie Sanders, a Vermont independent, would give Treasury
Secretary Timothy Geithner 90 days to come up with a list of banks,
hedge funds and insurance companies deemed “too big to fail.”
Geithner would have one year to break them up.
The proposals are a turnaround from 10 years ago, when Clinton signed
the Gramm-Leach-Bliley Act. It gave rise to financial conglomerates
active in retail banking, insurance, stock brokerage and proprietary
trading.
Since then, the largest U.S. financial firms have more than tripled in
size. In 1999, the five largest firms -- Citigroup, Bank of America,
Chase Manhattan Corp., Morgan Stanley Dean Witter & Co. and Merrill
Lynch & Co. -- held $2.5 trillion in assets. As of Sept. 30, Bank of
America, JPMorgan, Citigroup, Wells Fargo & Co. and Goldman Sachs
Group Inc., now the five largest financial companies, held $8.3
trillion in assets.
John S. Reed, who headed Citicorp for 14 years before the 1998 merger
with Sanford “Sandy” Weill’s Travelers Group Inc. that created
Citigroup, last week apologized for his role in creating the company.
He said lawmakers were wrong to repeal Glass-Steagall, likening the
separation it created to a ship with compartments so that a single
leak doesn’t sink the whole vessel. Alan Greenspan, the former
Federal Reserve chairman, also favors breakups in some cases.
Gramm’s View
Geithner testified on Oct. 29 that regulators need authority “to
force the major institutions to reduce their size or restrict the
scope of their activities” if they become too risky. The Obama
administration hasn’t said whether it would support letting
regulators preemptively shrink the size of large, healthy companies.
Phil Gramm, the former Republican Senator from Texas who co-wrote the
act that undid Glass-Steagall, said, “I’ve never seen any evidence
to substantiate any claim that this current financial crisis had
anything to do with Gramm-Leach-Bliley,” Gramm said in a Nov. 10
telephone interview.
“In fact, you couldn’t have had the assisted takeovers you had,”
said Gramm, now a vice chairman at the investment bank division of UBS
AG, Switzerland’s biggest bank by assets. “More institutions would
have failed.”
Shotgun Marriages
Federal regulators last year orchestrated shotgun marriages for large
firms on the verge of failure, including Wells Fargo’s purchase of
Wachovia Corp. and Bank of America’s acquisition of Merrill Lynch.
The Federal Reserve, the financial industry and House Republicans say
large firms are necessary for a robust economy. Regulators already
have tools to protect the financial system from threats, including the
ability to force firms to raise capital levels, Federal Reserve
Governor Daniel Tarullo said in a Nov. 9 speech.
Reversing the trend of allowing more financial activities within
commercial banks is “unlikely to limit the too-big-to- fail problem
to a significant degree,” Tarullo said.
One obstacle for proponents is knowing when a financial firm’s size
poses a threat. “It is not easy to determine the appropriate or
optimal size of an organization,” former Federal Reserve Governor
Randall Kroszner, now with the University of Chicago Booth School of
Business, said in an interview.
To contact the reporters on this story: Alison Vekshin in Washington
at avekshin@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net
.
Find out more about Bloomberg for iPhone: bbiphone.bloomberg.com |
