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Trump Threat to Break Up Banks Isn't Scaring Wall Street Yet

That may change if another London Whale or Wells Fargo fake account scandal emerges.

By Robert Schmidt

(Bloomberg) --Despite President Donald Trump’s repeated assertions that he might support breaking up big banks, Wall Street isn’t worried. Yet.

The calm is fueled by signals from administration aides in private meetings with industry executives to discuss rolling back financial rules, a Trump priority. While not making any assurances, the officials aren’t harping on the issue, according to people who have participated in or been briefed on the discussions. In fact, the topic of reviving Glass-Steagall, the 1933 law separating investment and commercial banking, rarely comes up.

Just last month, Trump’s top economic adviser Gary Cohn eased the concerns of at least two bank chief executives officers who called him after he spoke approvingly of Glass-Steagall in a meeting with senators, people familiar with the matter said. Neither Cohn nor the Treasury Department’s Craig Phillips made a case for splitting up banks when they met recently with an important financial lobbying group, said some attendees.

There is also a sense in the industry that lawmakers have little appetite to take on another controversial legislative fight, especially one that would anger big donors. Republicans, who control both houses of Congress, are particularly loath to support such a dramatic reshaping of the banking system.

“I’m sure it will be brought up,” said Bob Corker, a Republican from Tennessee who sits on the Senate Banking Committee. “But is there a lot of momentum around this in the House and Senate? Currently there is not.”

Still, Trump’s most recent comments about breaking up banks, made in a Bloomberg News interview this week, have caused a few tremors as banking executives try to parse what he meant. Firms taking special notice include Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. All three have substantial footprints in commercial and investment banking, so their business models would be severely impacted if they had to break up.

Though they still think any action is unlikely, those firms are telling their trade associations and lobbyists they shouldn’t dismiss Trump’s comments out of hand. A nightmare scenario, some finance executives say, would be another major scandal like the JPMorgan trader known as the London Whale who lost billions of dollars, or Wells Fargo & Co.’s fake accounts fiasco. Such an embarrassment could spur a wave of lawmakers to support a drastic move like breaking up banks.

Spokesmen for the banks declined to comment.

Nevertheless, interviews with about a dozen people, including executives at most of the largest banks, industry lobbyists and lawyers focused on financial regulation, show that the administration’s rhetoric is often different from reality.

For example, Cohn told the bank CEOs who contacted him after his Senate meeting that he was simply responding to a question from Massachusetts Democrat Elizabeth Warren, implying that he had been trapped into discussing Glass-Steagall. He added that he was echoing comments Trump made on the campaign trail as well as backing language in the Republican platform that expresses support for the law, said people briefed on the conversations who requested anonymity. Both executives were left with the impression that they shouldn’t fret, the people added.

Later in the month, Cohn and Phillips, who is leading the Treasury’s review of financial regulations, met in Washington with the board of the Securities Industry and Financial Markets Association, known as Sifma. The two talked more about creating jobs and boosting lending, rather than making structural changes to banks.

White House spokeswoman Natalie Strom declined to comment on the meeting. She said Cohn is “putting his extensive knowledge of the financial world to work for the American people, and they are the ones he is thinking about when formulating economic policy.”

Cheryl Crispen, a Sifma spokeswoman, said: “We are not going to provide a comment on any discussions from our board meeting.”

Banking Giants

The Glass-Steagall law was part of the government’s move to regulate Wall Street in the wake of the 1929 stock market crash. It was repealed in 1999, spurring a wave of bank mergers and the growth of large, one-stop-shop financial services companies. Among the best known was the combination of Citicorp and Travelers Group that created Citigroup.

The 2008 financial crisis and the $700 billion taxpayer bailout of Wall Street sparked a renewed interest in the law, as some Democrats and others on the left argued that splitting up the massive firms would ensure that they would never again threaten the economy or need another rescue.

Congress, however, took another tack, passing the 2010 Dodd-Frank Act, which piled on new capital requirements and trading rules but left the largest banks intact. The result, many executives say, is stronger institutions that are able to provide large-scale lending and other services that the biggest, global corporations need.

‘America’s Interests’

“It would be against America’s interests to break up the large banks,” Brian Moynihan, CEO of Bank of America, the nation’s second-largest lender, said Wednesday at the Bloomberg Breakaway Summit in New York. In fact, he added, it would “be crazy.”

U.S. lawmakers debated the issue after the financial crisis and decided that universal banks are good for the economy, Daniel Pinto, JPMorgan’s head of investment banking, said Tuesday during an interview in Riyadh.

“They needed to be properly capitalized, have proper liquidity management and a strong resolution mechanism,” Pinto said. “That has already happened.”

As a candidate, Trump was highly critical of Dodd-Frank, saying its strictures have forced banks to cut back on lending. But he also praised Glass-Steagall, a nod to his populist, anti-Wall Street message.

Now in office, Trump and other administration officials have touted their support for a “21st century, modern Glass-Steagall.”

What that means, however, is anybody’s guess. None of Trump’s advisers have offered details on a plan and, in the Bloomberg News interview, the president was similarly vague.

“There are, you know, some people that want to go back to the old system, right?” he said. “So we’re going to look at that. We’re going to, we’re looking at it right now as we speak.”

No Action

Marcus Stanley, policy director at Americans for Financial Reform, said that he has a hard time taking Trump at his word, especially since he has populated his administration with finance executives.

“So far, Trump has just talked up Glass-Steagall without actually doing anything, which is what you’d expect from a guy who puts big banks in charge of policy,” said Stanley, whose group would like to see the law reinstated.

Financial firms don’t seem to be taking Trump’s threats at face value, either.

The large banks didn’t say much about re-instating Glass-Steagall in comments their trade associations have been submitting to the Treasury for its review of financial regulations. That process was triggered by an executive order Trump signed earlier this year, and the department is slated to issue a report in early June that lays out recommendations for eliminating rules.

Unnecessary Reform

Sifma, in a letter than ran some 260 pages, devoted about a paragraph to the issue, arguing that the litany of rules already imposed on banks make structural reform “unnecessary.”

Another organization, the Clearing House Association, barely noted the controversy at all, tucking in roughly a sentence on the issue deep into a 50-page draft that was recently sent to its members.

The lack of verbiage alarmed some of the lenders it represents, especially after Trump’s comments, and they lobbied to change it. Greg Baer, the association’s president, explained that he was reluctant to press the issue since Congress was unlikely to ever pass a new Glass-Steagall, people briefed on the discussions said. Instead, he offered to personally raise the matter with Treasury officials.

A Clearing House spokesman declined to comment. But when it released its letter to the Treasury earlier this week, there was new language opposing any move to break up banks. And, it was more prominently placed, in the last paragraph of the introduction.

--With assistance from Elizabeth Dexheimer, Jesse Hamilton, Ben Bain, Laura J. Keller, Hugh Son, Yalman Onaran, Dakin Campbell, Matthew Martin, Gavin Finch, Jennifer Jacobs and Margaret Talev.To contact the reporter on this story: Robert Schmidt in Washington at [email protected] To contact the editors responsible for this story: Jesse Westbrook at [email protected] Gregory Mott

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