Juggling Dynamite

Sometimes meaningful reform to reign in rampant self-dealing and corruption in the government and financial system can seem hopeless. And then something encouraging happens: last week on May 16, Sen. Tom Harkin (D-IO) introduced in the US Senate, S. 985 a companion Glass-Steagall bill. See: Bankster Alert

“Sen. Tom Harkin on Thursday introduced S. 985, which would rebuild the wall that had once separated commercial banking from brokerage and investment speculation. The Iowa Democrat’s bill came on the 80th anniversary of the original 1933 Glass Steagall Act.

The text of S.985 was not posted on the Senate website as of Friday afternoon, but it is believed to resemble HR 129, introduced by Reps. Marcy Kaptur, D-Ohio, and Walter Jones, R-N.C. Their measure has 62 bipartisan sponsors in the House.

Meantime, 20 state legislatures are considering resolutions urging Congress to reinstate Glass-Steagall. Lawmakers in four states — South Dakota, Maine, Indiana and Alabama – have passed such measures.

Harkin was one of eight senators to vote against financial deregulation that formally abolished Glass-Steagall in 1999.

The repeal, signed by President Bill Clinton in the waning days of his administration, cleared the way for Wall Street bankers to expand trading in bundled subprime mortgages, derivatives, collateralized debt obligations, credit default swaps and the like.

Inventing evermore exotic investment vehicles, the money movers pumped up a global financial bubble that burst in 2008.”

With interest and rates in the basement–the zeal for yield has driven desperate capital into heinously over-bought interest sensitive equities (financials, REITs) even as the more industrial sectors (materials, miners, energy) have appropriately sold off with the slowing global economy. A similar divergence in these sectors took place to start off the 2007-09 bear market. Dividend paying equities typically lag to the downside but they have not managed to decouple indefinitely from past down cycles.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

Senator Brown (D) articulates the rationale and provisions of the Too-Big-To-Fail Act which he co-authored with Senator Vitter (R) Here is a direct link.

Where the Dodd-Frank Act falters under the weight of complexity and tinkering at the edges of reform, the Brown Vitter Act achieves a powerful mix of substance and simplicity. The legislation has also been able to accomplish the seemingly impossible: finding unanimous support across a bipartisan Senate.

“By removing competitive advantages megabanks have over smaller and regional community bankers, the bill is a straightforward support of industry competition. That appeals to libertarians and consumer advocates alike.

Splitting the bank lobby: Perhaps the most significant development has been among the banking lobby itself. Before Brown-Vitter TBTF, the industry responded to all proposed regulatory reform legislation in lockstep. The new proposal splits the industry cleanly in half, with the megabanks on one side and everyone else on the other.

The broad strokes of the TBFA Act:

●Mandates a flat 15 percent capital requirement for any institution with more than $500 billion in assets

●Does not rely on ratings agency grades

●Removes off-balance-sheet assets and liabilities as different classes — they are treated as if they are on the balance sheet

●Requires derivatives positions to be included in a bank’s consolidated assets

●Requires that the capital cushion a bank holds be liquid

See: Can two senators end “Too big to fail?”