Senators float plan to break up big banks

By:  The Hill - Peter Schroeder
Source: The Hill

A bipartisan quartet of senators are seeking to break up the nation's biggest  banks through legislation that would rebuild a firewall between commercial and  investment banking.

Sens. Elizabeth Warren (D-Mass.), Maria Cantwell (D-Wash.), John McCain  (R-Ariz.) and Angus King (I-Maine) unveiled legislation Thursday that would  largely reimpose the Glass-Steagall Act, calling it a necessary protection for  taxpayers and a way to prevent financial institutions from becoming "too big to  fail."

"Despite the progress we've made since 2008, the biggest banks continue to  threaten the economy," Warren said. "The four biggest banks are now 30 percent  larger than they were just five years ago, and they have continued to engage in  dangerous, high-risk practices that could once again put our economy at risk.

"The 21st Century Glass-Steagall Act will reestablish a wall between  commercial and investment banking, make our financial system more stable and  secure, and protect American families."

Glass-Steagall, partially repealed in  1999, prevented banks that engage in traditional banking activities — and enjoy  a federal safety net via the Federal Deposit Insurance Corporation (FDIC) — from  engaging in riskier investment banking activities and selling insurance.

The new legislation would create a similar firewall, but would also modernize  it to prohibit new tactics employed by banks that carry heavy risk, such as  trading types of complex derivatives or taking on hedge fund or private equity  activities.

The bill would specifically define what qualifies as "business of banking" to  prevent big banks from getting involved in riskier activities.

Proponents argue that by splitting traditional banks from investment banking,  the bill reduces the chances of future bailouts by shrinking banks, and also by  removing the implicit guarantee that comes with the FDIC backstop.

McCain and Cantwell have previously pushed legislation to reimpose  Glass-Steagall in the wake of 2008's financial crisis. But they now have brought  on a potent Wall Street critic in Warren, as well as a moderate in King, who  identifies as an independent but caucuses with Democrats.

McCain voted in favor of 1999's Gramm-Leach-Bliley Act, which repealed key  portions of the original Glass-Steagall. But McCain now says that repeal has  allowed for a "culture of dangerous greed and excessive risk-taking" to take  root on Wall Street.

"Big Wall Street institutions should be free to engage in transactions with  significant risk, but not with federally insured deposits," he said.

McCain voted to approve the repeal legislation when it came out of the  Senate, but did not vote on the final conference report, as he was campaigning  for the 2000 GOP nomination.