Republican Bid to Gut Dodd-Frank Renews the Debate About Breaking Up the Banks

  • Republicans poised to issue bill overhauling financial rules
  • Democrats want to make fight a referendum on Glass-Steagall

Mnuchin Says He's Focused on Regulatory Reform

The roll-out of legislation this week that would rip up much of the Dodd-Frank Act marks a pivotal moment for Republicans’ efforts to overhaul post-crisis financial rules.

It’s also an opportunity for Democrats to push an agenda that GOP lawmakers and finance executives are less keen to talk about: Breaking up Wall Street megabanks.

QuickTake Too Big to Fail

The Republican bill, drafted by House Financial Services Committee Chairman Jeb Hensarling, has a lot that banks like. It would repeal the Volcker Rule, which restricts lenders from making speculative bets unless they use clients’ money. And it would reduce the frequency of burdensome exams that determine whether banks can pay shareholder dividends. House Speaker Paul Ryan of Wisconsin told reporters on Wednesday that he’ll seek a vote on the measure “as quickly as possible” after it’s approved by Hensarling’s committee.

But some Democrats have started strategizing on ways to leverage Hensarling’s bill to force Republicans to take a stand on controversial issues. That includes bringing back some version of the Glass-Steagall Act, the Depression era-law kept investment banking and consumer lending separate for more than six decades until it was scrapped in 1999. A handful of lawmakers blame the repeal for contributing to the 2008 meltdown, an argument that Wall Street flatly rejects.

A Perilous Path Ahead for Dodd-Frank Banking Law: QuickTake Q&A

“A total breakup of the banks is my goal, but I’m not averse to making compromises,” said Representative Mike Capuano, a Massachusetts Democrat who is considering proposing a Glass-Steagall amendment to Hensarling’s legislation. “Any progress we can make toward the concept of separation is better than what we have.”

Capuano and others who want to see banks shrunk have been emboldened by recent statements from Trump administration officials, including White House economic advisor Gary Cohn. Earlier this month, the former top executive at Goldman Sachs Group Inc. said he would support some version of Glass-Steagall being brought back.

Read more: A Perilous Path Ahead for Dodd-Frank Banking Law

The prospect of a politically-divided Congress passing any major financial services bill, particularly one that would force banks to dramatically rethink their business models, is a longshot. Still, having to register a vote on dismantling giant lenders presents risks for individual lawmakers, especially those who rely on political contributions from the finance industry.

While Republicans included a reinstatement of Glass-Steagall in the platform they approved during their national convention in July, it hasn’t been a key of the party’s agenda on Capitol Hill this year.

Just Rhetoric?

“Anything that gets Republican members on the record about where they stand is meaningful,” said Joe Valenti, director of consumer finance at the Center of American Progress, a progressive think tank. “It could be useful to see whether this is just rhetoric or whether there could be actual, serious debate on a proposal.”

Getting drawn into a fight over Glass-Steagall is something firms like JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. would like to avoid, as the issue illustrates the threat of President Donald Trump’s conflicting economic messages. While Trump has pledged to ease financial regulations that he says are crippling growth, he got elected in part due to his populist anti-Wall Street rhetoric on the campaign trail.

The House Financial Services Committee is holding a hearing on Hensarling’s bill Wednesday with a panel vote on the legislation planned for next week, giving Democrats a chance to offer amendments.

“Dodd-Frank has been a bigger burden to enterprise than all other Obama-era regulations combined,” Hensarling said at the hearing. “There is a better way.”

Brian Gardner, a financial policy analyst at Keefe, Bruyette and Woods, says a bigger threat to banks will emerge on Glass-Steagall if the Senate takes up a financial rules overhaul.

Cohn Endorsement

“It’s mostly a diversion at this time,” Gardner said in an interview. “But it could be a much bigger risk in the Senate where Democrats have an outsized influence and could decide to hold other financial measures hostage until they get a vote on Glass-Steagall.”

It was during a private meeting with senators that Cohn offered his Glass-Steagall endorsement, people who heard his comments have said.

When asked to elaborate, Cohn said he’s backed a clear separation between investment banking and consumer lending for years, adding that there are cultural differences between the two business lines, said the people who asked not to be named because the meeting was private.

His comments flustered bankers and their lobbyists, many of whom placed frantic calls to the White House and congressional offices seeking more details.

Banker Confusion

Part of the frustration banks have is confusion over what policy makers mean when they promote a separation of investment and commercial banking.

The phrase “21st century Glass-Steagall” was first coined by Senator Elizabeth Warren, a staunch liberal. But it has since been adopted by Trump and members of his administration. Treasury Secretary Steven Mnuchin told the Financial Times last week that one approach for implementing a modern version of Glass-Steagall could be walling off units of banks, instead of breaking them up.

“Anytime I hear this term 21st Century Glass-Steagall, I ask what it is, and I have yet to have anybody really tell me,” Citigroup Chief Executive Officer Mike Corbat said during an April 13 earnings call with investors and analysts. “I have yet to have anybody really explain to me what value there is."

The Wednesday hearing on Hensarling’s bill, dubbed the Financial Choice Act, may not provide Corbat or other bank CEOs much clarity. And even if an amendment was added that brings back Glass-Steagall, the legislation still isn’t likely to win support from many Democrats.

“I just can’t vote for this bill, it’s just so bad,” said Representative Brad Sherman, a California Democrat. “This isn’t the Financial Choice, it’s the wrong choice.”

— With assistance by Anna Edgerton

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