Too-big-to-fail fight brewing in Washington

The SEIU-led anti-big bank rally made a stop in Washington, picketing the offices of Goldman Sachs. Only about 100 protesters showed up with their signs, but that was good enough to get some coverage in Politico. The most memorable prop: a big red homemade vampire squid puppet, replete with fangs and cloak that every so often tried to wrap its tentacles around a globe on a stick.

This always makes for great street theater, but there are some real issues at play. When the protesters scream, "break them up," they are touching on a sensitive issue that has been rubbed raw by a recent proposal by Rep. Paul Kanjorski of Pennsylvania. He has proposed a controversial measure that would give the government the right to break up financial institutions deemed "too big to fail." He made his case at the Huffington Post.

The move has gained the support of politically powerful small banks, who feel aggrieved and unfairly tainted by the sins of the big banks. But big banks will fight with vigor on this one. This, in some ways, is a hill worthy of their last stand. This strikes to the very heart of their existence in some ways. And the big banks will be damned if they let it pass.

The Financial Services Forum, a lobbying group that includes the CEOs of firms like Goldman Sachs and JPMorgan Chase, sent a letter to Congress seeking to shift the debate, noting that size alone does not make firms risky. Indeed, Long-Term Capital Management wasn't even a bank. According to Reuters, the lobby is arguing in part that the key problem tends to be over-concentration in specific markets that raises levels of risk. Hedge funds may have something to say about that.

None other than Jamie Dimon felt compelled to weigh in with an op-ed in the Washington Post. Former Merrill Lynch CEO John Thain has also weighed in with an idea for big banks to pay into a fund that would be used to bail them out if they faltered, a sort of FDIC-like fund just for banks too big to fail. You can hear the Moral Hazard cries already. Is there a way to make executives personally liable? Some thought Sarbanes-Oxley would do the trick, but that doesn't appear to be the case.

I doubt that the break-them-up bill will ever pass into law. But it allows lots of people to air their issues. And the movement has developed more lasting power than many would have thought. - Jim