Citigroup, Bank of America Would Be Forced to Shrink Under Senators' Plans

Citigroup Inc., Bank of America Corp. and their biggest rivals could be forced to shrink or divest businesses under proposals emerging as the U.S. Senate weighs a sweeping overhaul of financial-industry regulations.

Senators are preparing amendments that would limit the share of deposits and assets banks could control or force them to separate investment-banking functions from commercial lending. The aim is to keep financial companies from getting so big their collapse could threaten the economy.

“If you’re too big to fail, from my standpoint, you’re too big,” said Senator Byron Dorgan, a North Dakota Democrat who plans to offer the divestiture amendment next week.

The Senate has begun debate on Banking Committee Chairman Christopher Dodd’s proposed rules overhaul, designed to prevent a repeat of the 2008 financial crisis that forced the U.S. to extend $700 billion in taxpayer funds to companies including Citigroup and Bank of America. Lawmakers are drafting rules amid voter anger over Wall Street risk-taking blamed for causing the worst economic collapse since the Great Depression.

Democratic Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware are offering an amendment to cap banks’ non-deposit liabilities at 2 percent of gross domestic product, or about $280 billion. About nine of the largest U.S. bank-holding companies, including Citigroup, Bank of America and JPMorgan Chase & Co., would have to shrink by 40 percent, according to a summary of the proposal released by Kaufman’s office.

The amendment also would impose a 10 percent cap on a bank holding company’s share of U.S. insured deposits.

Dodd Disagrees

Dodd, a Connecticut Democrat, told reporters yesterday he didn’t agree with the focus on size.

“It’s the issue of excessive risk,” Dodd said. “It has to do with capital standards, liquidity, leverage -- those are the things that really pose the threats.”

Staff for Dodd and Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee, will work this weekend to craft an amendment to combine their ideas to prevent future bailouts, a section of the bill Republicans argued contained loopholes that would perpetuate the practice.

Dodd told reporters he wanted to “put that whole issue aside” to allow the Senate to debate proposed changes on a consumer agency, derivatives and other parts of the legislation.

His bill would allow regulators to seize and liquidate failing firms whose collapse would threaten the economy, a power Democrats say could have kept the U.S. from having to prop up financial companies after credit markets froze in 2008.

Not Riskier

Financial industry groups and some Republicans said that large companies aren’t necessarily riskier.

“The reason that our large financial institutions are the size that they are is because we have companies in this country that need large institutions in order to be competitive,” said Senator Bob Corker, a Tennessee Republican who helped draft the liquidation section of Dodd’s bill.

“I know people can score political points and it’s great to take on Wall Street, but what we’ve got to be careful of in this debate is that we’re not cutting our nose off to spite our face,” he said yesterday.

Senator Maria Cantwell, a Washington Democrat, is working with Senator John McCain, an Arizona Republican, and others to craft an amendment to split commercial and investment banking, Cantwell’s spokesman John Diamond said. The amendment is based on a proposal Cantwell and McCain offered in December to reinstate the Depression-era Glass-Steagall Act.

Work With Industry

Financial Services Forum President Rob Nichols, who opposes limits on bank size, said the government should work with the financial industry to improve risk management, internal control, corporate governance and capitalization.

“To be a global financial leader, the United States needs small, medium and large financial institutions, with various business models and areas of expertise,” said Nichols, whose Washington-based trade group represents the chief executive officers of the largest financial firms.

Dorgan said he will propose requiring companies deemed too big to fail to divest certain businesses until they no longer pose a risk. He also plans to offer an amendment that would eliminate so-called naked credit-default swaps, which let investors bet on default of bonds they don’t hold.

“That’s just gambling, that’s betting, not investing,” Dorgan told reporters yesterday.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

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