Bernie Sanders' Bank Breakup Plan Is Simply Cuckoo

WASHINGTON — During his speech this week on his plan to end "too big to fail," Sen. Bernie Sanders worked his followers into a frenzy, leaving them chanting "break them up, break them up" by the end.

And no wonder. The Vermont lawmaker excoriated Wall Street, specifically blaming large commercial banks for the financial crisis, and making it sound relatively easy to dismantle them if he wins office.

"Within the first 100 days of my administration, I will require the secretary of the Treasury Department to establish a 'too big to fail' list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout," Sanders said. "Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy as authorized under Section 121 of the Dodd-Frank Act."

In theory, this sounds like a solid plan. It doesn't require congressional approval, since Dodd-Frank is already law, and the statute gives the Fed broad authority to force risky institutions to divest themselves of assets or off-balance-sheet items.

But in practice, this is cuckoo. There is more likelihood that I will be eaten by a great white shark while eating lunch at my desk than of this plan ever being enacted. Here's why:

Let's take as a given that Sanders is elected president. This in itself is an improbable hurdle for Sanders to overcome, given that he is polling behind Democratic presidential front-runner Hillary Clinton and would likely lose to a GOP candidate even if he did prevail in a primary contest. But 2016 is a weird election season, and stranger things have probably happened (though none immediately spring to mind).

So Sanders takes office in January 2017 and has his Treasury secretary, as promised, draw up a list of "too big to fail" banks and nonbanks, which presumably include institutions like JPMorgan Chase, Citigroup and Bank of America. And then he sets about breaking them up.

Here's the first problem. Section 121 of Dodd-Frank requires a vote from the Fed that such institutions pose a "grave threat to the financial stability of the United States," and a further vote from two-thirds of the Financial Stability Oversight Council. That means Sanders needs four of the seven Fed governors to go along with this plan, and seven of the 10 voting FSOC members to approve it. And that is just not going to happen.

For one, the current composition of the Fed board would never embrace such a draconian solution absent proof that these banks are a grave threat to the economy (proof that Sanders hasn't supplied as of yet). If the current Fed board thought the big banks needed to be broken up, it would be doing so already. Moreover, while Sanders could fill the two current vacant seats on the Fed board, the other five have long terms that extend until 2022 at the earliest. (Janet Yellen's term as Fed chair expires in 2018, but her term as a governor extends until 2024.) That's a long time to wait to gather the votes necessary for Sanders to implement his plan.

Even if the Fed assented, it would also need the concurrence of five of the following heads of these seven agencies: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Securities and Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency. (The two other votes are an independent insurance expert and the Treasury secretary, the latter of which would presumably not be a problem for Sanders.)

Ask yourself: How would Sanders get so many regulatory heads approved by the Senate if they wanted to slash and burn the country's biggest banks? Though there is plenty of anti-big-bank sentiment in Congress, most lawmakers don't want to go this far — and would have concerns about the economic repercussions of breaking up several large banks all at once. For Sanders to get nominees confirmed, the Democrats would at least have to regain the Senate, something that's possible in 2016. Democrats would also likely have to restrict the GOP's ability to filibuster nominees (something they did in November 2013) and then moderate Democrats who currently do not have a break-them-up mentality would have to embrace it.

But let's not stop there. Even if the Fed and the FSOC voted to break up the big banks, the legal challenge by the banks would make this process a long and bloody one. Section 121 of Dodd-Frank isn't quite as simple as Sanders makes it out to be. It doesn't allow regulators to just immediately force divestures. First they have to try restricting the ability of the company to offer risky products or imposing conditions on risky activities. Only if that fails can they move to the divestiture stage.

What's more, banks will fight this every step of the way in court. To force a breakup under Section 121, regulators will have to prove the institutions pose a "grave threat to financial stability," a vague legal term, but one which presumably has a high bar. The legal process would take years — and it's not at all clear the government would win.

To be fair to Sanders, making unrealistic promises to voters is what politicians have done since the Roman era. And it's certainly par for the course in this election season. Donald Trump wants to ban Muslims from entering the country, which sounds illegal, immoral and impractical to enforce. Several GOP candidates, meanwhile, have said they want to repeal Dodd-Frank, which is all but impossible to do unless Republicans sweep every Senate contest over the next several cycles.

Yet many of Sanders' adherents see him as above those other candidates, someone who can take the White House and accomplish great things. Maybe he could in other venues, but when it comes to breaking up the big banks, Sanders' plan would never work.