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Banking industry representatives argue the provision would be counterproductive, effectively increasing risk by forcing derivatives trading overseas or into less-regulated institutions such as hedge funds.
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Bankers may be unable to stop a tax if it does get added to the legislation because Democrats view it as a way to ensure the reform bill saves the government money and Republicans consider it politically risky to oppose.
May 4
WASHINGTON — Two Democratic senators are seeking to take the Wall Street reform bill one step further by pushing for adoption of an amendment that would eliminate the risk of "too big to fail" by capping the size of the six largest U.S. financial institutions.
The amendment, co-sponsored by Sens. Sherrod Brown, D-Ohio, and Ted Kaufman, D-Del., would limit the size of the largest banks by imposing a 10% cap on any bank holding company's share of total insured deposits.
"We want to put a hard limit on the size of these behemoth banks so they don't control so much of our economy that come crisis time we have to save them, we have to bail them out to save the economy," Brown said in a floor speech. "The simplest, most effective way to manage this risk is to spread it out to have several modestly sized institutions instead of a few giant ones," he said.
The amendment is expected to be taken up for a vote this week — along with dozens of others — as part of the debate on Senate Banking Committee Chairman Chris Dodd's reform bill. (See related stories:
Another amendment expected from Sen. Carl Levin, D-Mich., would change the business model for credit rating agencies by requiring them to be paid by an independent third party instead of receiving direct payments from investment banks whose products they rate.
"You would probably require the SEC to have an intermediary," the chairman of the Senate Permanent Subcommittee on Investigations told Dow Jones Newswires Tuesday. "They would be tasked with identifying the intermediary to avoid the conflict."
The Securities and Exchange Commission would also be asked to review credit rating firms' structures, he said.
Levin said he is still crafting the amendment, which will include other provisions designed to put a stop to abusive lending in the mortgage business. Levin said his amendment will address so-called liar loans that are based solely on what customers declare as their income as well as negative-amortization loans that cause mortgages to balloon by allowing homeowners to defer principal or interest payments.
Last month, Levin's subcommittee hauled in two of the biggest rating firms — Moody's Corp. and Standard & Poor's Corp. — after the panel's staff conducted more than a year of investigations into the relationship between rating firms and investment banks.
The Brown-Kaufman provision would also limit the size of nondeposit liabilities at financial institutions to 2% of gross domestic product for banks and 3% for nonbank institutions, and set a 6% leverage limit for bank holding companies and selected nonbank financial institutions.
Over the past 15 years, assets of the six major banks have leapt from 17% of GDP to 63%, Brown said. Combined, these large banks control $9 trillion of assets.
Kaufman said adopting the amendment would merely return the country's biggest banks to the size they were less than a decade ago. Using Goldman Sachs Group Inc. as an example, Kaufman said the bill would scale back the investment bank from $850 billion of assets, to just above $300 billion. Until 2003, Goldman's assets didn't exceed $100 billion.
Co-sponsors of the amendment are Sen. Bob Casey, D-Pa., Sen. Sheldon Whitehouse, D-R.I., Sen. Jeff Merkley, D-Ore., Sen. Tom Harkin, D-Iowa, Sen. Bernie Sanders, I-Vt., and Sen. Roland Burris, D-Ill. Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, former Fed Chairman Paul Volcker and Mervyn King, the governor of the Bank of England, among others, have endorsed the amendment.
Senate Majority Leader Harry Reid, D-Nev., called Dodd's proposed regulatory reform a "strong bill" that would hold Wall Street accountable and shield taxpayers from more bailouts. Reid also said Tuesday that plans to require 60 votes on each amendment would be "unnecessary" and only serve to make things more difficult. Reid said he hopes to finish work on the bill by next week.
