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Senate must bust up big banks if it wants real financial reform

President Barack Obama is absolutely right to insist that Congress, finally, get financial regulatory reform finished. And it’s tactically very smart to take the message to Wall Street and tell the financial titans that they will not be permitted to block reform any longer.

But the financial reform bill in the Senate in its present form is too weak to do the job of reining in Wall Street and preventing another financial crisis.

There are many elements that need to be added or improved, but the bill’s most glaring omission is its failure to break up the banks.

The mega financial institutions are now bigger than they were before the onset of the financial crisis. The simple solution is to order them to shrink.

The financial goliaths’ size gives them enormous political power, including the ability to thwart appropriate financial regulation.

Their enormous size and interconnectedness also is what gives them “too big to fail” status. While it is a good thing that the Senate bill includes authority for regulators to wind down failing megabanks, it is unlikely that this authority will be exercised, at least in times of crisis when many institutions are facing insolvency. Because of fear of the impact on the broader economy, the government will bail out these megabanks rather than let them fail. The only way to avert this problem is to make sure that institutions are not so big that their closure would threaten the financial system’s stability.

Because the market believes the biggest banks are “too big to fail,” they are able to borrow money at cheaper rates – a subsidy worth $34 billion a year, according to estimates by the Center for Economic and Policy Research.

We don’t need large banks to serve the broader economy; they introduce risk and provide inferior service. The largest banks dominate the risky derivatives market – with the top five commercial banks controlling 97 percent of the derivatives held by banks. And the largest banks charge consumers more and serve communities less well.

Sens. Sherrod Brown (D-Ohio), Ted Kaufman (D-Del.), Robert Casey (D-Pa.), Sheldon Whitehouse (D-R.I.) and Tom Harkin (D-Iowa) have introduced the SAFE Banking Act of 2010, which would impose caps on bank size and require the nation’s largest financial institutions to sell assets or spin off operations to come under the size cap.

For President Obama and Congress to deliver on the promise of bringing Wall Street and the big banks under control, it is imperative that the SAFE Banking Act be included in the final financial reform legislation.

Robert Weissman is president of Public Citizen.