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Break-up-the-big-banks fever hits the states

Kevin Cirilli

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Aug. 13, 2013

Elizabeth Warren’s effort to break up Wall Street banks through a return to Depression-era laws may not have a lot of support in Congress, but it has a sympathetic audience in state capitals across the country.

Lawmakers in at least 18 states have introduced resolutions this year calling on Congress to split up banking giants by putting back in place a wall between commercial banking, taking deposits and making loans, and investment banking, the world of traders and deal-makers.

Five years after the 2008 financial crisis and three years after enactment of the 2010 Dodd-Frank law, these symbolic resolutions show there is still a significant amount of public anger toward big banks.

And if these proposals gain enough traction in state legislatures, a growing number of members of Congress could feel pressure to get behind this effort to reinstate the 1933 Glass-Steagall Act — a cause Warren championed as a candidate and has reinvigorated as a freshman Massachusetts senator.

(QUIZ: Do you know Elizabeth Warren?)

“We on the state level have been looking for an Elizabeth Warren — someone to carry this banner for us,” said Illinois state Rep. Mary Flowers, a Democrat who is the lead sponsor on a resolution introduced in May that urges Congress to reinstate Glass-Steagall, which was repealed in 1999.

Maryland Democratic state Del. Aisha Braveboy, who co-sponsored a resolution in her state, said: “She is the inspiration.”

So far, only Maine and South Dakota have approved a Glass-Steagall resolution. The states where lawmakers are pressing the issue include Mississippi, Pennsylvania, Alabama and California.

This week, the National Conference of State Legislatures will vote on a Glass-Steagall resolution introduced by Delaware Republican state Sen. Catherine Cloutier at its legislative summit in Atlanta.

(Also on POLITICO: Morning Money)

Large banks aren’t taking the issue lightly.

Take Delaware — corporate home to the credit card operations of several banks.

When a group of bipartisan state senators introduced a resolution in June calling for a return to Glass-Steagall, four lobbyists — including those working on behalf of JPMorgan Chase and Bank of America — showed up at a hearing to denounce the idea. The resolution was shelved.

“I can’t say I was really surprised by the pushback,” said state Sen. Bruce Ennis, a Democrat who is one of the resolution’s co-sponsors. “They don’t want to rock the boat.”

Delaware state Sen. Robert Venables, a Democrat and another co-sponsor, added: “I’m 80 years old and I remember the aftermath of the Great Depression — this was why it was put in. And then the Clinton administration repealed it.”

Not all state lawmakers pushing for a breakup of big banks cite Warren, a liberal who came to prominence because of her calls to get tough on Wall Street, as an inspiration. Several are conservatives with a tea partier’s dislike of Wall Street and the taxpayer bailouts that resulted from the financial crisis.

In South Dakota, state Rep. Stace Nelson — a self-described tea partier with a “mean libertarian” streak — and other state lawmakers urged Senate Banking Committee Chairman Tim Johnson (D-S.D.) last month to support Glass-Steagall after the state Legislature adopted the measure earlier this year.

“People are gravely concerned about what has happened on Wall Street with the bailouts and the government getting involved,” said Nelson, who has formed a 2014 Senate exploratory committee.

Johnson and other senior Democrats oppose breaking up large banks, arguing that the reforms put in place by Dodd-Frank have made the financial system safer and have dealt directly with the causes of the financial crisis.

“Size, risk and complexity are not synonymous, and I believe Wall Street reform passed by Congress in 2010 provides the tools necessary to end ‘too big to fail,’” Johnson said in a statement.

The banking industry, along with several regulators, argue that putting back in place a separation between commercial and investment banking would not cure the ills that led to the 2008 financial crisis.

They say that the firms that failed or ran into the most trouble at that time did not have both commercial and investment banking operations.

“If you look at the companies that collapsed — AIG, Bear Stearns and Lehman Brothers — Glass-Steagall wouldn’t have affected them but other forms of reform would have,” Sen. Chuck Schumer (D-N.Y.), a member of Senate leadership, said in a brief interview.

Advocates of returning to a simpler banking model say the issue is not so much whether Glass-Steagall would have prevented the 2008 financial crisis as whether financial institutions that enjoy a government backstop, such as deposit insurance, should be allowed to take part in risky businesses, like derivatives trading, that fall outside the traditional banking business.

“By separating checking and savings accounts from high-risk activities, Glass-Steagall would make financial institutions smaller and safer and help reduce the risk of future government bailouts,” Warren, who last month introduced the 21st-Century Glass Steagall Act with Sens. John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine), said in a statement to POLITICO. “These basic rules will protect everyone — Democrats, Republicans and Independents — and I think that’s why we are seeing so much support for the bill.”

The banking industry has bemoaned that the debate has become more about the politics of Wall Street than it is about their argument that large financial institutions benefit the U.S. economy.

“The practical consequences aren’t even the point — this is just a free shot for them to score some populist points,” said Tony Fratto, a former White House and Treasury official in the George W. Bush administration who is now a partner at Hamilton Place Strategies, which works with banks.

Opponents of a return to Glass-Steagall also say that state lawmakers are being short-sighted, arguing it would end up hurting state and local governments. Municipal governments, for example, utilize banks for the sale of their bonds, which help pay for schools, infrastructure projects and retiree pension funds.

But some high-profile municipal bankruptcies, such as that of Jefferson County, Ala., have called into question whether big banks have also at times led local governments astray.

State lawmakers with a taste for Glass-Steagall said they aren’t buying the banking industry’s arguments and that they will continue to put pressure on their congressional delegations.

“Our country is treading in new territories: We’re bailing out banks instead of banks bailing out people — we lost our way, in my opinion,” Flowers said. “It’s really messed us up. Not that I’m a banking expert by any means, this is just common sense — you don’t have to be a banker to figure this out.”

http://dyn.politico.com/printstory.cfm?uuid=AF80CF7B-9965-D654-85A34FBE8BC4092D