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The Biggest Kiss: How Neither Political Party Wants to Break Up the Biggest Banks

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Neither Mitt Romney and the Republicans nor President Obama and many Democrats favor breaking up the big banks, the best way to prevent another taxpayer bailout after a financial crisis.

In last Wednesday's presidential debate, Governor Romney said the
Dodd-Frank Act is "the biggest kiss that's been given to New York
banks I've ever seen," claiming the Act enshrines the idea of
"systemically significant" institutions (SIFIs) as too-big-to-fail.
Since then, Democrats have responded that Dodd-Frank empowered
regulators to define and enforce higher capital and prudential
standards for SIFIs, as wells as "living wills" and orderly
liquidation authority to dismantle failing SIFIs, hardly a kiss those
SIFIs enjoy. Yet in the Spring of 2010, other Democratic Senators,
lead by Sherrod Brown (D-OH) and Ted Kaufman (D-DE), argued
vociferously that we shouldn't count on bank regulators (who had
failed in the lead-up to the crisis) to use these Dodd bill provisions
to end "too big to fail," that the Republicans had no plan at all, and
that the only way to prevent another financial crisis is to
statutorily limit the size of (and leverage used by) the largest banks
and non-banks.

In this excerpt from THE PAYOFF: Why Wall Street Always Wins, Senator Kaufman's chief of staff, Jeff Connaughton, explains how then Senator
Chris Dodd (D-CT), the Republican Caucus, and the Obama administration
worked together to defeat the Brown-Kaufman amendment to break up the
biggest banks.

Still Too Big To Fail

In more than twenty years in Washington, I'd never followed a major
bill through Congress as closely as I did the Dodd-Frank Act. In that
time, I'd never fully grasped the almost absolute power to steer the
bill wielded by committee chairs, especially when the leadership
delegates all responsibility to them, as Harry Reid did to Chris Dodd.
Almost nothing could happen on the Senate floor or get in the bill
without Dodd's approval. That was particularly true in this case
because Dodd and the Treasury Department wanted a squishy bill, and
the Republicans were willing to work with Dodd to weaken it. (In the
Senate, it takes unanimous consent for an amendment to come to the
floor for a vote. So Dodd and Shelby had a vice grip on what
amendments would be considered. They only accepted amendments they
both liked.) On this bill, Shelby had never negotiated in good faith
with Dodd. Indeed, Shelby had publicly and repeatedly said that he
preferred no bill at all. Yet Shelby and the Republicans would
cooperate by granting unanimous consent to Dodd's floor strategy,
because they trusted that Dodd wanted to pass the weakest possible
bill. And then the Republicans would still try to filibuster it.

Early in the Senate's consideration of the bill, I went to one of
Harry Reid's staff, making the case that Brown-Kaufman deserved a
debate and vote. He said, "Reid will only be for amendments that help
Democrats up for reelection." And when other Democratic senators went
to Reid about their amendments, Reid repeatedly said, "Work with
Dodd." That's why the Senate first considered an amendment authored by
Senator Barbara Boxer (D-CA); it consisted of precatory language
stating that Congress would never again bail out failing banks (that
is, until the next time Congress is forced to change its mind in a
bail-out-or-go-into-a-Depression scenario). It was meaningless, but it
helped Boxer in her Senate campaign for it to be a Boxer amendment.

Days dragged on with little Senate debate and few votes on amendments.
Before long, almost two weeks had gone by. Dodd would dawdle and
stall, blaming the Republicans for refusing to grant unanimous consent
when Democrats wanted to offer amendments with teeth. I knew at some
point Reid would come to the floor and say, "We've now been on this
bill for three weeks, we need to file cloture and have a vote so we
can move on to other pressing business." I began telling reporters the
Senate was having a "fake" debate.

Ted was trying his best to convince Republican senators to break up
the largest banks. He ran into Senator Tom Coburn (R-OK), who is very
conservative. Coburn told Ted that he'd been reading about his
speeches and would like to help. Later that day on MSNBC, Coburn said
he was working with Senator Kaufman on an amendment. On May 1, at a
dinner in Wilmington, the Republican Party state chairman came up to
Ted and said he supported everything Ted was doing on financial
reform. Ted talked to Republican Senators Isakson (R-GA), Barrasso
(R-WY), and Johanns (R-NE), reminding them that they represent
southern or western states, which from our country's founding have
been opposed to the power of big banks. "It would be good for you
politically if the front page of your hometown newspaper said 'Senator
Votes to Break Up Big Wall Street Banks.'" They agreed with Ted on the
politics, but said no. Senators McConnell and Shelby were working the
Republican caucus very hard, demanding unity.

We pushed hard to get a vote on Brown-Kaufman. Then, suddenly, when it
was clear to Dodd's vote counters that our amendment would fail (and
before a weekend when the Greek debt crisis threatened to get worse,
raising the specter of bank bailouts in Europe), Reid and Dodd
scheduled a vote for that very night. Some have called it a "flash
vote" because it was scheduled preemptively before we could gain any
further momentum. Earlier that day, the flash crash had hit the stock
market, vindicating Ted's months-long HFT [high-frequency trading]
campaign and enhancing his credibility with many of his Senate
colleagues.

Reid said, "We all know the issues." We couldn't argue that
Brown-Kaufman deserved a longer hearing. Since February 2010, Ted had
orated tomes. Twice, Senators Brown and Kaufman had come to the floor
and engaged in a dramatic colloquy, playing off the other in their
earnest desire to see the country protected from another financial
crisis. On May 5, Senator Durbin stopped Ted on the Senate floor and
said, "Jamie Dimon [the CEO of J.P. Morgan] asked me to tell you 'It
was the small banks that failed.'" Ted went right back to the
microphone and, without naming Dimon, said the Royal Bank of Scotland,
which was bigger than any U.S. bank, had failed. The only reason our
biggest banks like Citigroup didn't fail was because of TARP and
support from the Fed. After Brown and Kaufman finished, they walked
over to Senator Dodd in the well of the Senate and jokingly asked him
to accept their amendment. Dodd laughed and said no.

It was time to vote. Senators had to stand on one side or the other:
Did you believe, as even Alan Greenspan belatedly had mused, "if
they're too big to fail, they're too big"? Or did you believe, in
effect, size doesn't matter? Ted gave a brief summation. Our argument
was based in prudence. Whatever you thought had caused the financial
crisis, it's clear that six megabanks have become so gigantic -- and even
more so after the consolidation that took place during the crisis -- that
they're too big to fail. If there's ever another crisis, these
megabanks will be the recipients of a massive taxpayer bailout. The
Fed has admitted that no economies of scale enable megabanks to help
America better compete in a global economy -- that's a false argument
that banks make to preserve their ability to borrow at lower rates
(because the markets perceive them to be government-backed). Why not
place a statutory limit on their size and the amount of relative
borrowing they can use?

No one could confuse the issue, at least I thought. But, just before
voting, Senator Dianne Feinstein (D-CA) -- one of the most liberal
members of the Senate -- asked Durbin, the majority whip, "What's this
amendment?" According to Durbin, who later told Ted, he replied: "To
break up the banks." Giving the thumbs-down sign, Feinstein said
bemusedly: "This is still America, isn't it?"

Fifteen minutes later, the Brown-Kaufman amendment to break up the
megabanks lay dead on the Senate floor, shot through by sixty-one no
votes. Three Republicans -- Richard Shelby (R-AL), Tom Coburn (R-OK) and
John Ensign (R-NV ) -- joined 30 Democrats who voted for it. Most of the
same senators who'd swallowed the novel idea of a $700 billion
taxpayer-funded bank bailout just couldn't comprehend the idea of the
government putting a size cap on any business. As Senator Judd Gregg
(R-NH) had asked on the Senate floor: "What are we going to do next?
Limit the size of McDonald's?" Last I checked, Big Macs hadn't
collapsed, destroyed $20 trillion in housing and financial wealth, and
thrown eight million Americans out of work. Under antitrust law, we
stop businesses from combining if it leads to market power and
consumer harm. Why can't Congress limit bank size to prevent financial
instability and massive economic harm?

All along it had felt like the Charge of the Light Brigade. For months
Ted -- canon to the left of him, canon to the right of him -- had gone to
the Senate floor to speak truth to power. Time called him "The
Replacement Senator Giving Democrats Fits." Where was the rest of the
cavalry? You'd think that senators would at least come to the floor
and debate what role Wall Street had played in the disaster and what
needed to be done about it. For a long time, Ted was the only one. It
had been exhilarating as Ted galloped down the gauntlet, opposing the
President, Larry Summers and Tim Geithner, Wall Street, the Delaware
banks, and, most especially, the no-plan Republicans. He threw caution
to the wind, cheered on by the media, his hometown Wilmington News,
and many Americans (and, best of all, Delawareans). Then we reached
the canon line, vaulted it, were dismounted on landing, and lay in
stunned disarray, knowing that for us and for now, the battle was
over.

If it felt that way to me, imagine how it felt to Ted. He'd put his
heart and soul into it, reaching deep inside for wisdom and eloquence
("stemwinders," one reporter called his speeches; even the Guardian
called them "remarkable"). Senator Bob Corker (R-TN) said on the
Senate floor, "I admire the senator for his passion." Another senator
came up to him and said, "You're a regular Demosthenes." Ted could get
quite angry, and yell, red-faced, "In the 1930s, our forebears in the
Senate passed legislation that worked for three generations! We can't
just pass it back to the regulators . . . the buck stops here. In the
Senate." I had watched at my desk on C-Span more than once and said,
"He's like Biden." It was his finest hour.

Yet it was all over for the Brown-Kaufman amendment. After several
drafts of a press release, I asked Ted, just returned from the
stinging Senate floor defeat: How do we start it? He slumped into his
chair and dictated: "I am disappointed." Not long afterwards, a senior
Treasury official was quoted about the Brown-Kaufman amendment: "If
we'd been for it, it probably would have happened. But we weren't, so
it didn't."

To read more and buy the book, visit jeffconnaughton.com