A key House Democrat released on Wednesday his much-awaited proposal to end "too big to fail": Let the federal government break them apart.
Paul Kanjorski's amendment would give federal regulators the authority to force the country's biggest financial firms or those that pose the biggest risk to the financial system to sell assets or entire divisions.
A new council would decide the fate of these firms. For those that are forced to part with more than $10 billion in assets federal regulators would need the Treasury Secretary's approval; for those forced to sell more than $100 billion, the president will need to be consulted.
"Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail," Kanjorski said in a statement.
From Kanjorski's office:
Size is by no means the only factor to determine if a financial company is "too big to fail." The recent financial crisis has shown that many other factors can also cause a company to become a systemic risk. Rather, the amendment considers a variety of objective standards to determine if financial firms pose a threat to our financial stability, including the scope, scale, exposure, leverage, interconnectedness of financial activities, as well as size of the financial company. The Kanjorski amendment does not cap the size of financial institutions.
If a financial company is deemed systemically risky, the Kanjorski amendment provides responsible preventative actions to protect our financial system and curtail those risks. These include modifying existing prudential standards, imposing conditions on or terminating activities, limiting mergers and acquisitions, and in the most extreme cases, breaking up the company.
Lobbying firms representing the country's biggest banks immediately condemned the proposal.
"It will act as a strong disincentive for financial firms to grow and to be able to serve corporate America," Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, representing many of the largest U.S. financial firms in Washington, told Bloomberg News.
But the movement to break up these firms may be gaining steam. Along with former Fed chairman Paul Volcker and former Citigroup chairman John Reed, a leading bank analyst said Wednesday that giant banks may not be the best thing for the economy.
"Big banks don't allocate credit effectively to the middle markets, they do it on national basis," said Paul Miller, an analyst with FBR Capital Markets, at the Reuters Global Finance Summit. "Credit will be tougher to get for the small business man if 80 percent of the lending or 50 percent of the lending is controlled by four institutions. You're already seeing it happen today."
The country's four biggest bank-holding companies -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo -- collectively hold $7.4 trillion in assets. To put that in perspective, that's 52 percent of the country's total output last year.