Financial Reform Provision Would Break Up Nine Biggest Banks and Affect All Primary Dealers

Details are still sketchy at the moment but it is clear that financial reform is going to pass. Moreover, according to Marketwatch, Provision would break up nine biggest banks.

Nine of the largest financial institutions including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. would have to scale down by about 40%, according to legislation introduced by a group of eight Democrats on Thursday. The group is hoping the measure will be approved as part of sweeping bank reform legislation under consideration on Capitol Hill. The measure limits the size of non-deposit liabilities at financial institutions to 2% of U.S. gross domestic product, or about $300 billion. It's unclear whether congressional leaders will allow the measure to be voted upon by the full Senate or whether lawmakers would approve it.

Inquiring minds seeking additional details are reading U.S. Senate Opens Debate on Wall Street Legislation

The U.S. Senate began debate on Democrats� financial-overhaul bill today, including a provision to create the first formal regulatory structure for the $605 trillion over-the-counter derivatives market.

Republicans decided to allow debate after Democrats agreed to change a section of the bill aimed at preventing future bailouts of Wall Street banks similar to the $700 billion bailout Congress approved in 2008 for firms including Citigroup Inc. and American International Group Inc.

Earlier this week, Republicans blocked Democrats from starting debate on the measure in three procedural votes.

At issue is a provision that would give the government new power to take apart failing financial firms whose collapse would shake the economy. It would create a $50 billion industry- supported fund that regulators would use to pay the cost of dissolving a firm. Republicans say the language contains loopholes that wouldn�t end bailouts.

Dodd acknowledged the concern and said the Senate would consider an amendment offered by Senator Barbara Boxer, a California Democrat, to require that no taxpayer funds be used to disassemble a failed company.

The legislation would create a consumer financial protection bureau at the Federal Reserve and a council of regulators to monitor the economy for systemic risk. It would strengthen oversight of hedge funds and ban proprietary trading at U.S. banks.

I am in favor of a ban on proprietary trading but it will accomplish nothing unless enacted with teeth, and without loopholes. Properly executed, all the Primary Dealers would be affected. That list includes Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley and others.

In regards to creating a new $50 billion oversight industry funded by the industry, I suggest it is a waste of time. Worse than that, the bill will likely punish small banks and financial institutions that were not involved in this mess, by making them pay a part to cleanup the next mess the bill creates.

Regulators always get in bed with the institutions they regulate. This time will not be different.

Bank Size Limitations

Credit.Com notes Bank size limited under new financial reform measure

Under the measure, companies would not be able to hold any more than 10 percent of the nation's total insured deposits. Bank of America Corp., JP Morgan Chase & Co. and Wells Fargo Co. already violate this size limit, according to the report, and would be given three years to downsize.

Nondeposit liabilities would also be limited under the bill, to 2 percent of America's overall gross domestic product for banks or 3 percent of GDP for nonbanks. U.S. Senator Ted Kaufman spoke to the National Organization of Investment Professionals about the importance of the legislation.

"When mega-banks fail, their interconnected nature inevitably leads to a systemic risk, a collapse in confidence and the classic patterns of a bank run," Kaufman, a Democrat from Delaware, said. "By splitting up these mega-banks, we by definition will make them smaller, safer, and more manageable."

Democratic Senators Sherrod Brown of Ohio, Jeff Merkley of Oregon, Robert Casey of Pennsylvania and Sheldon Whitehouse of Rhode Island also offered their support for the measure, which would be included in the financial reform passed in March.

In theory, significant changes are coming. In practice, the devil (loopholes) is in the details.

Also note that financial reform is centered around preventing the last problem from reoccurring. However, it's not the last crisis we need to worry about but the next one.

Even if Congress did nothing, the odds of blowing another housing bubble are negligible. Moreover, somewhere in these reform bills, perhaps not even intentional, will be loopholes or totally new provisions that financial institutions will exploit to create the next crisis. Such problems may not surface for years or longer.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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