Wall Street Faces ‘Live Ammo’ as Congress Aims to Unravel Banks
By Alison Vekshin and Robert Schmidt
Nov. 12 (Bloomberg) -- Seven Wall Street lobbyists trooped to Capitol Hill on Nov. 9, hoping to convince Representative Paul Kanjorski’s staff that his plan to dismantle large financial firms was a bad idea.
They walked out with a sobering conclusion, according to the accounts of two attendees who requested anonymity because the meeting was private. Not only was Kanjorski serious, he planned to offer the legislation as early as next week -- and it just might pass.
Today marks a decade to the day that President Bill Clinton signed the repeal of the Depression-era Glass-Steagall Act that split investment-banking from lending and deposit-taking. The repeal allowed the creation of Citigroup Inc., the financial colossus now propped up by $45 billion in taxpayer rescue funds. Financial firms are scrambling to prevent Congress from re- imposing the act.
“We’re playing with live ammo,” said Sam Geduldig, a lobbyist at Clark Lytle & Geduldig who represents financial- services firms and wasn’t at the Nov. 9 meeting. “The banking community is rightfully concerned.”
The Financial Services Forum, which represents chief executive officers of 18 of the largest financial firms and whose lobbyists organized the visit to Kanjorski’s office, has scheduled or met about a dozen lawmakers or aides with the House Financial Services Committee in the last week. The U.S. needs big financial firms to compete globally, said Rob Nichols, the group’s president.
‘Vocal and Persistent’ Presence
“Boeing and IBM can’t bank at the Silver Spring Community Bank,” Nichols said. He said he’ll be “vocal and persistent in the halls of Congress.”
Lawmakers are considering breakup proposals after public outcry over the $700 billion rescue of firms including Citigroup, Bank of America Corp. and American International Group Inc. Congress passed Glass-Steagall in 1933 after speculative activities by many banks brought the system close to collapse. One result: Morgan Stanley, the investment bank split off from what is now JPMorgan Chase & Co.
“You don’t ever want to be in the situation again where something is too big to fail,” Senate Banking Committee Chairman Christopher Dodd told Bloomberg Television yesterday. The Connecticut Democrat, who unveiled a regulatory overhaul proposal this week, said the government should have the power to break apart large institutions “as a very last resort.”
Edward Yingling, president of the American Bankers Association, which represents banks of all sizes in their dealings with the U.S. government, declined to comment on efforts to turn back pending legislation.
Frank Supports Both
Representative Barney Frank, chairman of the House Financial Services Committee, has proposed giving the Federal Reserve authority to force holding companies whose size threatens financial stability to sell assets or halt certain activities. Representative Ed Perlmutter, a Colorado Democrat, wants to amend Frank’s bill so that the Fed could impose Glass- Steagall on a case-by-case basis, said his spokeswoman, Leslie Oliver.
Kanjorski, a member of Frank’s panel and chairman of its capital markets subcommittee, would go further by allowing the U.S. to dismantle any large firm whose size and risk-taking threaten the financial system.
Frank supports both the Kanjorski and Perlmutter plans. “I believe both will be adopted,” he said on Nov. 3.
John Reed’s Apology
Senator Bernie Sanders, a Vermont independent, would give Treasury Secretary Timothy Geithner 90 days to come up with a list of banks, hedge funds and insurance companies deemed “too big to fail.” Geithner would have one year to break them up.
The proposals are a turnaround from 10 years ago, when Clinton signed the Gramm-Leach-Bliley Act. It gave rise to financial conglomerates active in retail banking, insurance, stock brokerage and proprietary trading.
Since then, the largest U.S. financial firms have more than tripled in size. In 1999, the five largest firms -- Citigroup, Bank of America, Chase Manhattan Corp., Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. -- held $2.5 trillion in assets. As of Sept. 30, Bank of America, JPMorgan, Citigroup, Wells Fargo & Co. and Goldman Sachs Group Inc., now the five largest financial companies, held $8.3 trillion in assets.
John S. Reed, who headed Citicorp for 14 years before the 1998 merger with Sanford “Sandy” Weill’s Travelers Group Inc. that created Citigroup, last week apologized for his role in creating the company. He said lawmakers were wrong to repeal Glass-Steagall, likening the separation it created to a ship with compartments so that a single leak doesn’t sink the whole vessel. Alan Greenspan, the former Federal Reserve chairman, also favors breakups in some cases.
Geithner testified on Oct. 29 that regulators need authority “to force the major institutions to reduce their size or restrict the scope of their activities” if they become too risky. The Obama administration hasn’t said whether it would support letting regulators preemptively shrink the size of large, healthy companies.
Phil Gramm, the former Republican Senator from Texas who co-wrote the act that undid Glass-Steagall, said, “I’ve never seen any evidence to substantiate any claim that this current financial crisis had anything to do with Gramm-Leach-Bliley,” Gramm said in a Nov. 10 telephone interview.
“In fact, you couldn’t have had the assisted takeovers you had,” said Gramm, now a vice chairman at the investment bank division of UBS AG, Switzerland’s biggest bank by assets. “More institutions would have failed.”
Federal regulators last year orchestrated shotgun marriages for large firms on the verge of failure, including Wells Fargo’s purchase of Wachovia Corp. and Bank of America’s acquisition of Merrill Lynch.4. The unemployment situation from a real perspective and a sneak at the Industrial production - which wipes out all the recovery lies spread around. The lies on payroll statistics are unbelievable - read for yourself below why we rather are close to 22% right now. Imagine how the extreme scenario for banks stresstests was measured on a 10% unemployment and what the reality of their balance cheats may look like.
Excerpts from Shadow statistics
BLS Revision Nightmare: March 2009 Payrolls Overstated by 824,000 • Birth-Death Model Falsely Boosting Jobs Reporting in Recession Environment • Monthly Jobs Loss of 263,000 (Payroll Survey) versus Monthly Employment Decline of 710,000 (Household Survey) • September Unemployment Rates: U.3 = 9.8%, U.6 = 17.0%, SGS = 21.4%