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Megabank breakup gathering steam?

By Claes Bell · Bankrate.com
Wednesday, March 27, 2013
Posted: 3 pm ET

Something strange is happening on Capitol Hill. The nation's largest banks, once considered untouchable thanks to their massive lobbying budgets, are looking more vulnerable than ever to serious legislative action, including being broken up altogether.

In the past, a host of prominent public figures and regulators, including Federal Reserve Bank of Dallas President Richard Fisher and former Citigroup CEO Sandy Weill, have said that the nation's largest banks should be downsized.

But now a bipartisan group of senators is getting in on the act. In late February, Sen. David Vitter, R-La., and Sen. Sherrod Brown, D-Ohio, gave floor speeches highlighting the dangers of so-called too-big-to-fail banks, or banks so large their failure would destabilize the U.S. financial system.

In his speech, Vitter floated the idea of forcing megabanks to carry more safe, low-earning assets, effectively offsetting the lower borrowing costs large banks pay because the market assumes the government will step in to prevent them from failing.

Then, late Friday night, the Senate unanimously passed an amendment to its stopgap budget offered by Vitter that would end too-big-to-fail subsidies or funding advantage for Wall Street megabanks (with more than $500 billion in total assets)." Six banks -- JPMorgan Chase & Co., Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- meet that size standard.

The amendment is nonbinding, meaning it doesn't require action on the part of legislators, regulators or banks. But, it's still a significant step in a town that has historically handled big banks and their CEOs with kid gloves.

So why the change? It may be because the financial industry backed a lot of losing horses in the most recent election, including former Massachusetts Sen. Scott Brown. It's also possible that the London Whale incident, in which JPMorgan, long considered the most prudent of the TBTF banks, incurred massive losses in a botched derivative trade, tipped the scales toward reform in some pols' minds. Or, it could have been U.S. Attorney General Eric Holder admitting banking giant HSBC was too big to prosecute for money laundering.

Or maybe senators are just watching the polls. Americans' opinions of big banks has suffered ever since the financial crisis. A 2010 ABC poll found that more than three-quarters of Americans felt big banks had not "done enough to make amends for their part in the economy's meltdown." A Rasmussen poll, published last week, found that half of Americans say they favor a plan to break up megabanks.

Of course, passing a nonbinding amendment isn't the same thing as putting in place a law that would either directly break up the big banks or put in place conditions that would make it economically untenable for megabanks to continue operating in their current form. Considering the very narrow margins by which the Dodd-Frank financial reform law passed the Senate, that still seems like a long shot.

What do you think? Should Congress take action to cut banks down to size?

Follow me on Twitter: @ClaesBell.

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