Rep. Kanjorski has proposed that federal regulators have the power to dismantle firms "too big to fail," even if they’re not financially at risk. Breaking up 'too big to fail' firms

Just when Wall Street thought it couldn’t get worse for them on Capitol Hill – it did.

Rep. Paul Kanjorski (D-Penn.), a senior member of the Financial Services Committee, has proposed the most explosive provision so far in the debate over financial reform, seeking to empower federal regulators to preemptively break up financial firms deemed "too big to fail."


The powers Kanjorski is proposing are sweeping – he wants to hand the federal government a measuring stick to figure out which companies are a threat to the larger financial system, then give the feds the authority to break them up regardless of their financial health.

Kanjorski said during Tuesday’s House Financial Services Committee hearing that his provision would make it “so that nowhere in the world in the future will there be gigantic tsunamis coming out of nowhere and striking the entire world economy.”

Kanjorski insisted in a later interview that he wasn’t out to get the financial industry, even though one New York Democrat warned that such wide ranging authority would signal the “death knell” for financial markets.

There are 15 or 20 firms, Kanjorski said, particularly in the financial industry, that are “so large that every body knows that we can’t allow them to fail.” He declined to name names.

Financial industry officials say Kanjorski’s proposal would kill American jobs, send top financial companies fleeing for foreign shores and generally imperil the American economy. Large multi-national corporations would bypass hobbled American banks for competitors in Hong Kong or Europe that are still big enough to provide the multi-billion-dollar lines of credit global firms require.

“That type of bill is going to send a near-death knell through the financial markets,” said Rep. Mike McMahon (D-N.Y.), who’s Staten Island district relies heavily on Wall Street and the broader financial industry. “It’s akin to a doctor diagnosing a patient to be sick without even doing an examination and it clearly puts way too much power into the hands of the federal government.”

But Kanjorski has piqued the interest of one ally on the other side of the Capitol — Alabama Republican Richard Shelby, who said he liked Kanjorski’s idea, as far as he understood it.

Shelby said he supports regulators having the power to make financial firms “stronger or smaller” before they pose a threat to the economy.

The U.S. government has broken up its share of big comanies. Teddy Roosevelt busted more than 40 trusts during his presidency and the Department of Justice forced "Ma Bell" to sell off the "Baby Bells."

"It's not a real new idea," said Rep Brad Miller (D-N.C.), a supporter of Kanjorski's idea.

Kanjorski said he would unveil the actual legislative language in the next week or two, and industry lobbyists aren’t yet sure how far his proposal will actually go.

But the measure nonethless set off alarms across K Street, and officials rejected the notion that big is automatically bad in the financial industry.

Lehman Brothers – whose collapse helped spark the larger financial meltdown – wasn’t that big, while JP Morgan is big but fairly prudent, as one lobbyist for a major financial interest pointed out.

“Large, diversified financial institutions provide unique and very significant economic value, for several reasons. Because of their size, diverse array of products and services and geographic reach, they are able to serve the needs of large globally active firms in a way that smaller, local banks simply can’t,” said Rob Nichols, president of the Financial Services Forum, a policy group made up of CEOs of the world’s 18 biggest financial services firms, including Goldman Sachs, Citigroup and JPMorgan Chase.

What’s more, industry argues, the underlying bill being debated in Financial Services – legislation that aims to end the need for taxpayer bailouts – already grants federal regulators broad powers essentially ending the existence of “too big to fail” firms.

The bill would give the Federal Reserve express authority to limit a financial institution’s activities, increase its capital requirements and force it to divest itself of certain risky lines of business, said Ken Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association.

“That’s a lot of authority to address those issues, and I think it’s more nimble… than trying to set some arbitrary size limit,” he said.

But Kanjorski clearly doesn’t believe the underlying bill goes far enough. He says the powers granted to the Fed are “limited power… its not clearly defined. We’re going to be evident in the power.”

The power he envisions is so sweeping, in fact, that he believes the president should have to sign off on any final decisions.

Kanjorski wants to set in stone a series of “objective standards” to measure financial institutions and determine if they need to be busted up. He’s looking at all kinds of measurements – not size but also complexity, he said. Kanjorski is coordinating with the European Union, which should resolve competitiveness concerns since the two together account for 80 percent of the world’s equities and bonds, he said.

House Financial Services Chairman Barney Frank (D-Mass.) said he supports Kanjorski’s amendment – although Frank described the measure as the power to break firms up on a case-by-case basis, which sounds more limited than Kanjorski’s vision.

Kanjorski said he’s getting some good feedback. “Most people are coming up to me and saying we should have done this originally, why didn’t we?”