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Senate Bill Would Break-Up TBTF Banks

Posted By Barry Ritholtz On November 9, 2009 @ 11:30 am In Bailouts,Regulation | Comments Disabled

“If an institution is too big to fail, it is too big to exist. We should break them up so they are no longer in a position to bring down the entire economy.”

-Senator Bernie Sanders, (I, Vt)

“It’s the natural action of capital to grow and exceed. Now we’re going to contain it.”
-Representative Paul Kanjorski

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Everyone this weekend was so busy watching the Health care bill, that they might have overlooked the most important financial reform legislation since the Commodities Future Modernization Act: A bill is gaining ground in Congress that would “break-up” big banks.

Independent U.S. senator Bernie Sanders has introduced the Volcker Plan. It gives the government the power to identify and break up financial firms that are “too big to fail.”

“In the aftermath of the worst financial crisis in decades, nations are trying to determine what to do about banks and financial firms that are so large that their failure could threaten the stability of the global financial system.

The goal is to prevent another debacle like last year’s when Lehman Brothers collapsed, triggering a credit crisis and huge taxpayer bailouts of AIG (AIG.N), Citigroup (C.N), Bank of America (BAC.N) and others . . .

Another approach, which Sanders and others back, would be to prevent the firms from getting so big in the first place. Sanders’ legislation would give Treasury Secretary Timothy Geithner 90 days to list commercial banks, investment banks, hedge funds and insurers that he deems too big to fail.

The bill defines that as “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.” It would give a new government systemic risk council break-up power, with clearance from the president.

Larger banks are expected lobby aggressively against it — but mid-sized and smaller financial institutions might be supportive. The bailouts have created an oligopoly, which makes it challenging for the smaller banks to market themselves.

The regional banks — the ones that are not TBTF — could find a more level playing field in which they could better compete in the market place, if this bill becomes law. Currently, they are at an enormous disadvantage versus the government subsidized giants . . .

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Sources:
A BILL To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities [1].

http://sanders.senate.gov/files/AYO09C99.pdf

TOO BIG TO FAIL – TOO BIG TO EXIST [2]
November 6, 2009

http://sanders.senate.gov/newsroom/news/?id=b8b8fce1-60b9-4a4b-9bd8-a774761b2182

Big bank “break-up” idea gains ground in Congress [3]
Kevin Drawbaugh
Reuters, Nov 6, 2009

http://www.reuters.com/article/BROKER/idUSN0618960720091106

111THCONGRESS
1STSESSION

To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities.

IN THE SENATE OF THE UNITED STATES
Mr. SANDERS introduced the following bill; which was read twice and referred to the Committee on A BILL

To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Too Big to Fail, Too Big to Exist Act’’.

SEC. 2. REPORT TO CONGRESS ON INSTITUTIONS THAT ARE TOO BIG TO FAIL.
Notwithstanding any other provision of law, not later than 90 days after the date of enactment of this Act, the Secretary of the Treasury shall submit to Congress a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes are too big to fail (in this Act referred to as the ‘‘Too Big
to Fail List’’).

SEC. 3. BREAKING-UP TOO BIG TO FAIL INSTITUTIONS.
Notwithstanding any other provision of law, beginning 1 year after the date of enactment of this Act, the Secretary of the Treasury shall break up entities included on the Too Big To Fail List, so that their failure would no longer cause a catastrophic effect on the United States
or global economy without a taxpayer bailout.

SEC. 4. DEFINITION.
For purposes of this Act, the term ‘‘Too Big to Fail’’ means any entity that has grown so large that its failure would have a catastrophic effect on the stability of either
the financial system or the United States economy without substantial Government assistance.


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URL to article: http://www.ritholtz.com/blog/2009/11/senate-bill-would-break-up-tbtf-banks/

URLs in this post:

[1] A BILL To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities: http://sanders.senate.gov/files/AYO09C99.pdf

[2] TOO BIG TO FAIL – TOO BIG TO EXIST: http://sanders.senate.gov/newsroom/news/?id=b8b8fce1-60b9-4a4b-9bd8-a774761b2182

[3] Big bank “break-up” idea gains ground in Congress: http://www.reuters.com/article/BROKER/idUSN0618960720091106

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