Sanders shows plan to break up Wall St. giants
Sen. Bernie Sanders, I-Vt., on Wednesday unveiled legislation that would place a hard cap on the size of financial institutions.
WASHINGTON — Sen. Bernie Sanders, I-Vt., on Wednesday unveiled legislation that would place a hard cap on the size of financial institutions, a proposal that would splinter Wall Street’s biggest firms in an effort to ward off future taxpayer bailouts.
The measure is dead on arrival with a Republican Congress and President Donald Trump in office. And even if the current Democratic Party were to take control of government, it would face a difficult path to passage, as many of the party’s moderates have opted for answers to the banking crisis that did less to alter the financial system.
Sanders’ bill would bar financial institutions from holding assets, derivatives, and other forms of borrowing worth more than 3 percent of the entire U.S. economy, or $584 billion in today’s dollars.
The legislation would force federal regulators to break up six different Wall Street firms — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — as well as insurance giants such as Prudential Financial and MetLife. Collectively, the targeted firms hold more than $13 trillion in assets, according to Sanders aides.
Despite its unlikelihood of passing in the near-term, the measure could become a marker for Democrats seeking support from the party’s progressive voters, much like a single-payer, universal health care system has become.
Sanders touts the plan as a way to prevent a repeat of the financial crisis of a decade ago, when banks on the edge of collapse were large enough that their failures would rock the fundamentals of the global financial system. In response, the federal government extended the banks massive loans, a move largely credited with blunting the crisis but that also gave government funding to wealthy individuals at a time when unemployment was soaring and thousands were losing their homes.
“We spent huge amounts of money bailing them out, and they are significantly larger now than they were back then,” Sanders said in an interview. “It’s time we return to that discussion, especially now for the 10th anniversary [of the crash].”
In response to the crisis, Democrats narrowly passed a broad banking law that was meant to ensure that “too big to fail” banks took steps to ward off failure, subjecting the largest firms to more stringent restrictions aimed at limiting their risk.
The law, signed by former president Barack Obama, had 16 separate chapters and ran more than 2,300 pages long. Sanders’ measure runs seven pages, and instead goes after the size of banks, arguing firms of that size pose an inherent risk to the economy.
“This legislation cuts to the heart of the matter, by putting a size cap on the largest highly leveraged firms. The size cap is simple, straightforward, and transparent,” said Simon Johnson, an economist at MIT who served as chief economist of the International Monetary Fund and supports the bill.
Sanders’ plan was criticized by some analysts on Wall Street, who pointed to dramatic improvements in the capital cushions banks now hold to ward against collapse. Dodd-Frank, Obama’s 2010 banking law, put new capital requirements into effect for the largest financial institutions.
“The financial system is not over-leveraged as it was in 2006 and 2007,” said Allen Sinai, an economist at Decision Economics. “They’re in much better shape today.”
Jim Kessler, president of the centrist think-tank Third Way, said Democrats should instead focus on expanding capital in rural areas where he said small business lending has stalled.
“I’m not sure anyone has won an election going against the big banks,” Kessler said. (In an interview, Sanders pointed to the ads Trump ran in the 2016 presidential election promising to take on Wall Street.)
Even some broadly sympathetic to Sanders’ efforts to restrain the size of Wall Street banks think the legislation is too ambitious. Thomas Hoenig, who recently stepped down as vice chair of the Federal Deposit Insurance Corporation that regulates the banking industry, said it would already be a very difficult to get enough support even to pass a far less stringent cap on banks’ size.