Friday, April 30, 2010

The Senate gets into the swing of bankwhacking

Some months ago, as health care reform languished and the Senate ground nearly to a halt, one read frequent laments that the moment for sweeping financial reform was being wasted -- that by the time the Senate got around to full consideration, memories would have faded, rage against the banks cooled, and lobbyists' hooks sunk ever deeper. 

Reasonable worries, perhaps. But those who despaired of strong reform did not reckon on HCR passage changing the dynamic in Congress; or on the pressure that would be generated by bringing the bill to the floor just as election season heated up; or on the fresh spur to rage afforded by an SEC suit (and criminal investigation) against the nation's most lucrative financial institution.

Just nine days ago, Jonathan Chait was marvelling at the strength of the Dodd ill as it came to the floor. Now, the WSJ reports, a tide of amendments is bidding to restrict financial institutions' activity far more radically:
Sens. Ted Kaufman (D., Del.) and Sherrod Brown (D., Ohio) plan an amendment that would prohibit any bank from ever holding more than 10% of the country's deposits and put strict caps on the debt banks issue.

Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) have worked on an amendment that would force commercial banks to separate from investment banks—revisiting the Glass-Steagall Act of the 1930s.

Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) plan a provision to forbid banks with federally insured deposits from certain trading activities.

 Obama administration officials have declined to weigh in on any specific amendments, with one exception: a move by Sen. Bernie Sanders (I., Vt.) to give the government more power to audit certain operations at the Federal Reserve. Fed and administration officials have signaled they would fight to stop it at all costs. Mr. Sanders has more than a dozen co-sponsors.

"I can't predict, but I think we've got a good chance to pass it," Mr. Sanders said.
When  Obama proposed his Volcker rule, banning FDIC-insured banks from proprietary trading or owning hedge funds and private equity shops, the move was widely dismissed as political showmanship, unlikely to be included in the final bill.  Ditto for Blanche Lincoln's proposal to force banks to spin off their derivatives trading operations.  Now both of those restrictions look like live possibilities, more moderate than other proposals hitting the floor (though Cantwell and McCain proposed their Glass-Steagall revival months ago). Now perhaps there's some danger in the other direction -- a pile-on to pass ever-more sweeping provisions, some of them out of true with the Dodd bill's architecture or the administration's wishes.

BTW, banks are already theoretically banned from holding more than 10% of the country's deposits.  But lo, several have been granted waivers, and three are over the limit (NYT). According to the Times, the bill would "cap the amount of non-deposit liabilities of any one bank — effectively, the amount the bank borrows in various ways to finance its operations — at an amount equal to 2 percent of the nation’s." That is exactly what Peter Boone and Simon Johnson proposed last November -- at least, it's the upper end of the scale for limiting bank size that they floated.

1 comment:

  1. I approve of all this. Being a bank is basically a license to print money anyway (did you know that banks literally create money when they make loans? that's why it's not an inflation risk to pump stimulus into the economy when loans aren't being made, as Krugman often pointed out). Given that banks are federally insured and benefit greatly and intrinsically from a product of the federal government--the dollar--they should be tightly regulated. If banks want to do whatever they want, they should have to print their own currency like in the old days.