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Financial Regulatory Reform

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New Rules of the Road for the Financial Sector  

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Global Engagement

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America's economic prosperity depends on active engagement with the global economy.

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Competitive Tax Rates

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Competitive tax rates fuel economic growth and job creation.

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Engagement with China

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The U.S.-China economic relationship is the most important bilateral relationship in the world today.  

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Economic Value of Large Financial Institutions

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Large financial institutions provide significant value to the U.S. economy and American investors, business owners, and savers.

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By Alison Vekshin and Robert Schmidt

Nov. 12 (Bloomberg) -- Seven Wall Street lobbyists trooped to Capitol Hill on Nov. 9, hoping to convince Representative Paul Kanjorski’s staff that his plan to dismantle large financial firms was a bad idea.

They walked out with a sobering conclusion, according to the accounts of two attendees who requested anonymity because the meeting was private. Not only was Kanjorski serious, he planned to offer the legislation as early as next week -- and it just might pass.

Today marks a decade to the day that President Bill Clinton signed the repeal of the Depression-era Glass-Steagall Act that split investment-banking from lending and deposit-taking. The repeal allowed the creation of Citigroup Inc., the financial colossus now propped up by $45 billion in taxpayer rescue funds. Financial firms are scrambling to prevent Congress from re- imposing the act.

“We’re playing with live ammo,” said Sam Geduldig, a lobbyist at Clark Lytle & Geduldig who represents financial- services firms and wasn’t at the Nov. 9 meeting. “The banking community is rightfully concerned.”

The Financial Services Forum, which represents chief executive officers of 18 of the largest financial firms and whose lobbyists organized the visit to Kanjorski’s office, has scheduled or met about a dozen lawmakers or aides with the House Financial Services Committee in the last week. The U.S. needs big financial firms to compete globally, said Rob Nichols, the group’s president.

‘Vocal and Persistent’ Presence

“Boeing and IBM can’t bank at the Silver Spring Community Bank,” Nichols said. He said he’ll be “vocal and persistent in the halls of Congress.”

Lawmakers are considering breakup proposals after public outcry over the $700 billion rescue of firms including Citigroup, Bank of America Corp. and American International Group Inc. Congress passed Glass-Steagall in 1933 after speculative activities by many banks brought the system close to collapse. One result: Morgan Stanley, the investment bank split off from what is now JPMorgan Chase & Co.

“You don’t ever want to be in the situation again where something is too big to fail,” Senate Banking Committee Chairman Christopher Dodd told Bloomberg Television yesterday. The Connecticut Democrat, who unveiled a regulatory overhaul proposal this week, said the government should have the power to break apart large institutions “as a very last resort.”

Edward Yingling, president of the American Bankers Association, which represents banks of all sizes in their dealings with the U.S. government, declined to comment on efforts to turn back pending legislation.

Frank Supports Both

Representative Barney Frank, chairman of the House Financial Services Committee, has proposed giving the Federal Reserve authority to force holding companies whose size threatens financial stability to sell assets or halt certain activities. Representative Ed Perlmutter, a Colorado Democrat, wants to amend Frank’s bill so that the Fed could impose Glass- Steagall on a case-by-case basis, said his spokeswoman, Leslie Oliver.

Kanjorski, a member of Frank’s panel and chairman of its capital markets subcommittee, would go further by allowing the U.S. to dismantle any large firm whose size and risk-taking threaten the financial system.

Frank supports both the Kanjorski and Perlmutter plans. “I believe both will be adopted,” he said on Nov. 3.

John Reed’s Apology

Senator Bernie Sanders, a Vermont independent, would give Treasury Secretary Timothy Geithner 90 days to come up with a list of banks, hedge funds and insurance companies deemed “too big to fail.” Geithner would have one year to break them up.

The proposals are a turnaround from 10 years ago, when Clinton signed the Gramm-Leach-Bliley Act. It gave rise to financial conglomerates active in retail banking, insurance, stock brokerage and proprietary trading.

Since then, the largest U.S. financial firms have more than tripled in size. In 1999, the five largest firms -- Citigroup, Bank of America, Chase Manhattan Corp., Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. -- held $2.5 trillion in assets. As of Sept. 30, Bank of America, JPMorgan, Citigroup, Wells Fargo & Co. and Goldman Sachs Group Inc., now the five largest financial companies, held $8.3 trillion in assets.

John S. Reed, who headed Citicorp for 14 years before the 1998 merger with Sanford “Sandy” Weill’s Travelers Group Inc. that created Citigroup, last week apologized for his role in creating the company. He said lawmakers were wrong to repeal Glass-Steagall, likening the separation it created to a ship with compartments so that a single leak doesn’t sink the whole vessel. Alan Greenspan, the former Federal Reserve chairman, also favors breakups in some cases.

Gramm’s View

Geithner testified on Oct. 29 that regulators need authority “to force the major institutions to reduce their size or restrict the scope of their activities” if they become too risky. The Obama administration hasn’t said whether it would support letting regulators preemptively shrink the size of large, healthy companies.

Phil Gramm, the former Republican Senator from Texas who co-wrote the act that undid Glass-Steagall, said, “I’ve never seen any evidence to substantiate any claim that this current financial crisis had anything to do with Gramm-Leach-Bliley,” Gramm said in a Nov. 10 telephone interview.

“In fact, you couldn’t have had the assisted takeovers you had,” said Gramm, now a vice chairman at the investment bank division of UBS AG, Switzerland’s biggest bank by assets. “More institutions would have failed.”

Shotgun Marriages

Federal regulators last year orchestrated shotgun marriages for large firms on the verge of failure, including Wells Fargo’s purchase of Wachovia Corp. and Bank of America’s acquisition of Merrill Lynch.

The Federal Reserve, the financial industry and House Republicans say large firms are necessary for a robust economy. Regulators already have tools to protect the financial system from threats, including the ability to force firms to raise capital levels, Federal Reserve Governor Daniel Tarullo said in a Nov. 9 speech.

Reversing the trend of allowing more financial activities within commercial banks is “unlikely to limit the too-big-to- fail problem to a significant degree,” Tarullo said.

One obstacle for proponents is knowing when a financial firm’s size poses a threat. “It is not easy to determine the appropriate or optimal size of an organization,” former Federal Reserve Governor Randall Kroszner, now with the University of Chicago Booth School of Business, said in an interview.

 

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Phone: (202) 457-8783

 

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Phone: (202) 457-8759

Twitter

fsforum RT @petejryan: Recent research lends credence to @ForumPrez argument that the #TBTF phenomenon is fading http://t.co/UmkQymEr9I
fsforum Financial trades push back on commodities crackdown http://t.co/px3uzcwo1d via @hillsonthemoney
fsforum Forum,@SIFMA @ABABankingNews @FSRoundtable @IIBnews send comment letter on bank involvement in commodities activities http://t.co/mmIE3lQDf3

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The Financial Services Forum is a non-partisan financial and economic policy organization comprising the CEOs of 18 of the largest and most diversified financial services institutions doing business in the United States.

The purpose of the Forum is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.