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Bernie Sanders' Bank Breakup Plan Is Simply Cuckoo

WASHINGTON — During his speech this week on his plan to end "too big to fail," Sen. Bernie Sanders worked his followers into a frenzy, leaving them chanting "break them up, break them up" by the end.

And no wonder. The Vermont lawmaker excoriated Wall Street, specifically blaming large commercial banks for the financial crisis, and making it sound relatively easy to dismantle them if he wins office.

"Within the first 100 days of my administration, I will require the secretary of the Treasury Department to establish a 'too big to fail' list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout," Sanders said. "Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy as authorized under Section 121 of the Dodd-Frank Act."

In theory, this sounds like a solid plan. It doesn't require congressional approval, since Dodd-Frank is already law, and the statute gives the Fed broad authority to force risky institutions to divest themselves of assets or off-balance-sheet items.

But in practice, this is cuckoo. There is more likelihood that I will be eaten by a great white shark while eating lunch at my desk than of this plan ever being enacted. Here's why:

Let's take as a given that Sanders is elected president. This in itself is an improbable hurdle for Sanders to overcome, given that he is polling behind Democratic presidential front-runner Hillary Clinton and would likely lose to a GOP candidate even if he did prevail in a primary contest. But 2016 is a weird election season, and stranger things have probably happened (though none immediately spring to mind).

So Sanders takes office in January 2017 and has his Treasury secretary, as promised, draw up a list of "too big to fail" banks and nonbanks, which presumably include institutions like JPMorgan Chase, Citigroup and Bank of America. And then he sets about breaking them up.

Here's the first problem. Section 121 of Dodd-Frank requires a vote from the Fed that such institutions pose a "grave threat to the financial stability of the United States," and a further vote from two-thirds of the Financial Stability Oversight Council. That means Sanders needs four of the seven Fed governors to go along with this plan, and seven of the 10 voting FSOC members to approve it. And that is just not going to happen.

For one, the current composition of the Fed board would never embrace such a draconian solution absent proof that these banks are a grave threat to the economy (proof that Sanders hasn't supplied as of yet). If the current Fed board thought the big banks needed to be broken up, it would be doing so already. Moreover, while Sanders could fill the two current vacant seats on the Fed board, the other five have long terms that extend until 2022 at the earliest. (Janet Yellen's term as Fed chair expires in 2018, but her term as a governor extends until 2024.) That's a long time to wait to gather the votes necessary for Sanders to implement his plan.

Even if the Fed assented, it would also need the concurrence of five of the following heads of these seven agencies: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Securities and Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency. (The two other votes are an independent insurance expert and the Treasury secretary, the latter of which would presumably not be a problem for Sanders.)

Ask yourself: How would Sanders get so many regulatory heads approved by the Senate if they wanted to slash and burn the country's biggest banks? Though there is plenty of anti-big-bank sentiment in Congress, most lawmakers don't want to go this far — and would have concerns about the economic repercussions of breaking up several large banks all at once. For Sanders to get nominees confirmed, the Democrats would at least have to regain the Senate, something that's possible in 2016. Democrats would also likely have to restrict the GOP's ability to filibuster nominees (something they did in November 2013) and then moderate Democrats who currently do not have a break-them-up mentality would have to embrace it.

But let's not stop there. Even if the Fed and the FSOC voted to break up the big banks, the legal challenge by the banks would make this process a long and bloody one. Section 121 of Dodd-Frank isn't quite as simple as Sanders makes it out to be. It doesn't allow regulators to just immediately force divestures. First they have to try restricting the ability of the company to offer risky products or imposing conditions on risky activities. Only if that fails can they move to the divestiture stage.

What's more, banks will fight this every step of the way in court. To force a breakup under Section 121, regulators will have to prove the institutions pose a "grave threat to financial stability," a vague legal term, but one which presumably has a high bar. The legal process would take years — and it's not at all clear the government would win.

To be fair to Sanders, making unrealistic promises to voters is what politicians have done since the Roman era. And it's certainly par for the course in this election season. Donald Trump wants to ban Muslims from entering the country, which sounds illegal, immoral and impractical to enforce. Several GOP candidates, meanwhile, have said they want to repeal Dodd-Frank, which is all but impossible to do unless Republicans sweep every Senate contest over the next several cycles.

Yet many of Sanders' adherents see him as above those other candidates, someone who can take the White House and accomplish great things. Maybe he could in other venues, but when it comes to breaking up the big banks, Sanders' plan would never work.

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Comments (18)
Let's just say that sanders breaking up the banks is insane!The Rothschilds run the world and you think they're just going to sit around and let some crazy old man ruin their cash cow?The last man to say he was going to break up the fed didn't fair too well,and breaking up the banks is almost on par with getting rid of the fed.The federal reserve is a private bank and anyone who challenges people with the power of the banks ends up taking a trip to Dallas!I guess because sanders is about 102 he doesn't care but trying to be a zany democratic trump isn't going to help the country or himself.His last job netted him about 31,000 a year.job he has now 192,600 a year.presidents salary 492,000 does anyone see the pattern.he is a money Hungary politician just like the rest of them.the only way our country gets better is if we clean house,all new members of the house,the senate,and congress!
Posted by Bety39 | Saturday, January 30 2016 at 1:01PM ET
Rob, if you reread the article you have written, you may understand why perhaps, only bankers may be able to enjoy this piece. Let's think about the phrase 'Too Big To Fail'. Now let's think about our recent history as a society, having to actually deal with 'Too Big To Fail'. By now everybody knows the citizens of the United States of America had to bail out the banks that gave us the global recession. Your article suggests and confirms what Bernie Sanders is saying, that the system is rigged. You wrote - "Section 121 of Dodd-Frank requires a vote from the Fed that such institutions pose a "grave threat to the financial stability of the United States," and a further vote from two-thirds of the Financial Stability Oversight Council. That means Sanders needs four of the seven Fed governors to go along with this plan, and seven of the 10 voting FSOC members to approve it. And that is just not going to happen." Then you said "Even if the Fed assented, it would also need the concurrence of five of the following heads of these seven agencies: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Securities and Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency. (The two other votes are an independent insurance expert and the Treasury secretary, the latter of which would presumably not be a problem for Sanders.)" Then you wrote: "What's more, banks will fight this every step of the way in court. To force a breakup under Section 121, regulators will have to prove the institutions pose a "grave threat to financial stability," a vague legal term, but one which presumably has a high bar. The legal process would take years — and it's not at all clear the government would win." What I am wondering is, How does the average tax paying citizen of this country digest your article? I clicked on this link because of the title 'Bernie Sanders' Bank Breakup Plan Is Simply Cuckoo' & the site that published it - American Banker. I could be wrong, but this article may convince more people to elect the only candidate who is telling it like it is, Bernie Sanders.
Posted by MoneyHoney | Saturday, January 09 2016 at 9:10AM ET
Wayne, you totally called it. Had that Who line in my head the whole time I wrote that comment.
Posted by rblackwe | Friday, January 08 2016 at 5:29PM ET
I'm thinking that Rob may be a fan of classic rock and is conjuring up The Who, "Won't Get Fooled Again." Meet the new boss, same as the old boss. I think that the song was written just after a good read of "Animal Farm."
Posted by WayneAbernathy | Friday, January 08 2016 at 5:28PM ET
Usbanker61, the problem with revolutions is that often you end up in the same place you started. The other problem? Usually the ones chanting the loudest for the revolution at some point end up against the wall. The U.S. has the oldest continuous republic in the world -- let's not be in such a rush to overthrow it. You might not like what comes after.
Posted by rblackwe | Friday, January 08 2016 at 5:16PM ET
Rob, bipartisanship may have worked in the 1800's. It doesn't work now. How many times have you heard the terms "political gridlock" and "government shutdown" lately? Many times it's over common sense issues, but corporate money gets in the way. The system is broke and no longer works on the state or federal level. Our political leaders also get way too much time off, considering they hardly work when in D.C. - other than to collect money from lobbyists and run for their next election. I'm off topic but somehow it relates to Bernie wanting drastic change. It may not be Bernie, and it may take a revolution, but change will come. Millions of people are disgusted by U.S. politics - Howard Zinn's People's History of the United States explains it well if you want the truth.
Posted by usbanker61 | Friday, January 08 2016 at 5:02PM ET
Rob, I agree with your conclusion but for very different reasons. Your argument about not getting the FSOC to go along is what lawyers call "special pleading"--either circumstances would induce the FSOC to act on a coordinated basis or Section 121 is a farce and yet another spurious "reform." No doubt the members of the FSOC, supported by the lobbying of the powerful big banks and seduced by the prospects of revolving doors would be difficult to galvanize. Nevertheless, forceful presidents and Congress, elected by large enough majorities, have in the past accomplished goals just as big as "breaking up the big banks" (think Glass-Steagall itself). Where I agree with your conclusion, however, is that all the rhetoric about the big banks fails to focus on what size might be considered appropriate. No one has tried to tackle that issue and I am not sure that anyone can come up with an answer that is sufficiently rational to survive constitutional scrutiny when it is alleged that certain banks were picked arbitrarily for breakup. A better approach would be to impose meaningful incremental restraints on risky behavior, properly fund the regulators, and understand the financial system more fully. And it would help if some of the big bankers tried to display industry leadership instead of whine about efforts to protect taxpayers from their externalities or try to claim that smaller banks are also to blame (utter nonsense). Don't, however, underestimate Bernie's appeal to large numbers who are very frustrated and angry at the political power of the big banks and their seeming reluctance to use that power in anything other than a blatantly self-interested way.
Posted by Lawrence Baxter | Friday, January 08 2016 at 12:27PM ET
I actually wasn't arguing that this plan is impossible because the current system is too corrupt. But what Sanders is suggesting is an extreme solution done arbitrarily. He's concluded that the big banks are a "grave threat" and need to be demolished, but a lot of other people have to reach that same conclusion for the breakup to occur. That's not a corrupt system -- it's actually the way you want the system to work.
Posted by rblackwe | Friday, January 08 2016 at 10:53AM ET
If I read this correctly you are detailing exactly how the existing system of crony capitalism can be counted on to thwart any attempt at reform? Well, that's a hell of novel way to argue your case.
Posted by WSpackman | Friday, January 08 2016 at 10:33AM ET
For most of the history of the United States, bank regulatory/supervisory policy has been bipartisan--or perhaps even best described as nonpartisan. There have been disagreements, of course, but they have not tended to break along party lines. There have been exceptions to this, generally brief and not usually happy.
Posted by WayneAbernathy | Friday, January 08 2016 at 10:31AM ET
Here's what worries me. It's not your dismissal of the entire argument by claiming I'm "obviously" a Republican (folks on both sides of the aisle routinely accuse me of playing for the other team; this is a standard way to disagree without producing anything of substance.) It's this line:"Bipartisanship needs to be extinguished." That line scares the hell out of me, in fact. Democracy requires compromise and compromise is at the heart of bipartisanship. If we extinguish it, we extinguish our form of government -- and that is a very dangerous line of thinking.
Posted by rblackwe | Friday, January 08 2016 at 10:24AM ET
Bernie is correct in saying that banks, Wall Street, big oil and lobbyists are running this country. He may not break up the big banks, but something needs to be done. And Rob - you're obviously a Republican and you're very wrong. There's a good chance he could get elected President. Trump's a fool, and most of the other (R) candidates are faux news products; Hillary isn't as popular of a choice as she thinks she is - unless women decide otherwise this year. The country needs someone with common sense - we got it right with Obama but he had no support from the republicans or the media. After 200 years of failing, bipartisanship needs to be extinguished along with the U.S. Electoral College. PS. WayneAbernathy's comment is right on.
Posted by usbanker61 | Friday, January 08 2016 at 9:41AM ET
I remember a very wise man saying to me, that it is hard for any one person to get much done in Washington, and the Founders intended it that way.
Posted by WayneAbernathy | Thursday, January 07 2016 at 4:40PM ET
Political candidates, especially Presidential candidates, are full of promises they know they can never keep. This primary season seems different because when Bernie, Donald and the other goofs running do that, it is evidently crazy talk on its face. I'm not sure which kind of lie is more pernicious.
Posted by Brian L. | Thursday, January 07 2016 at 3:50PM ET
Ah, yes, the "backing of the American people" argument. The great, silent majority out there that will sweep Sanders into office and enact a glorious golden age of unicorns and salsa dancing. Sorry, Rogelio, but no. Even if Sanders could get elected -- and he can't, not really -- he couldn't enact this plan. Wishing otherwise won't make it so.
Posted by rblackwe | Thursday, January 07 2016 at 3:48PM ET
Great summary Rob. Facts are always so fascinating to add to a proposal like Bernie's. Whenever I read about Bernie's banking plans, I'm reminded of a Lily Tomlin quote, "No matter how cynical you get, it's never enough to keep up."
Posted by NWIowa Banker | Thursday, January 07 2016 at 3:40PM ET
You are whistling through the graveyard Rob. Bernie can, and will, do what he says, and he will have the backing of the American people. Banking greed has just pushed a little too far.
Posted by Rogelio | Thursday, January 07 2016 at 3:35PM ET
Rob Blackwell nails it and uses the appropriate word -Cuckoo. The good news is that none of this will ever happen. The bad news is that someone at this level in policy making is actually voicing policies like this.
Posted by commobanker | Thursday, January 07 2016 at 3:27PM ET
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