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Breaking Up Biggest Banks Would Be a ‘Huge Mistake,’ Mnuchin Says

May 19, 2017 / Source: Bloomberg

by 
Robert Schmidt
 and 
Jesse Hamilton
May 18, 2017, 10:50 AM CDT May 18, 2017, 2:53 PM CDT

Treasury Secretary Steven Mnuchin said breaking up the biggest banks would be a “huge mistake,” easing concerns that the Trump administration plans a major revamp of Wall Street.

“We do not support a separation of banks and investment banks,” Mnuchin said Thursday at a Senate Banking Committee hearing, just weeks after President Donald Trump said his administration was reviewing whether a split made sense. “That would have a very significant” impact on financial markets and the economy, the Treasury chief added.

Mnuchin’s remarks appear to put to rest a question that has roiled the industry for months. Some administration officials have suggested they are in favor of Congress passing an updated version of the Depression era Glass-Steagall law that split commercial and investment banking, though they have been vague about what that means. It was repealed in 1999.

While reviving Glass-Steagall would be a drastic step, lawmakers on both sides of the aisle have argued it might be the best way to prevent banks from becoming so large that they endanger the financial system. The Republican party supported reinstating the law in the platform they issued in July. One of Wall Street’s loudest critics, Massachusetts Democratic Senator Elizabeth Warren, has also endorsed the move.

Why Megabanks Fear the Return of Glass-Steagall: QuickTake Q&A

In a dramatic exchange at Thursday’s hearing, Warren called Mnuchin’s comments “bizarre” and a contradiction with previous statements. On May 1, Trump told Bloomberg News that his administration was actively examining whether to propose a breakup of the largest lenders after “some people” suggested doing so would be a good idea.

“This is like something straight out of George Orwell,” Warren said about the apparent flip-flop.

Warren then asked Mnuchin why he has called for a “21st Century” version of the law. He didn’t offer details beyond saying it’s a “complicated question.”

Mnuchin also noted that the administration does support some parts of Glass-Steagall. But he said dismantling banks would sap market liquidity and could pose other economic problems, as well.

‘No Reversal’

“We never said before that we supported a full separation,” Mnuchin said, rejecting the claim that this marked a policy reversal. He also apologized for the confusion that the 21st Century phrase, often bandied about by Trump and his aides, happens to match the title of the bill pushed for years by Warren and Republican Senator John McCain. Their legislation is called the “21st Century Glass-Steagall Act.”

“We never said we were in favor of Glass-Steagall; we said we were in favor of a 21st Century Glass-Steagall,” Mnuchin said. “It couldn’t be clearer.”

Warren, however, disagreed and pressed Mnuchin for more details. The Treasury secretary responded that he would be willing to meet one-on-one to discuss the issue further.

Cohn Support

National Economic Council Director Gary Cohn, a former top executive at Goldman Sachs Group Inc., has also spoken favorably of a new version of Glass-Steagall. 

Despite the lack of specifics, all the comments have caused much consternation at the largest lenders, especially Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. The three have substantial footprints in commercial and investment banking, so their business models would be severely impacted.

Mnuchin, who brought his actress fiancee to the hearing, also told the Banking Committee that the Treasury is close to finishing part of its review of financial regulations, as ordered by Trump in February. He said an initial report on banking rules, with a particular focus on easing constraints on community banks, will be released in the coming weeks.