Believe it or not, there is a bill in Washington to break up the Too Big To Fail banks. Sponsored by Senator Sherrod Brown (D-Ohio) and Senator David Vitter (R-Louisiana)  the Brown-Vitter bill would break up the Megabanks by requiring higher capital reserves. Not surprisingly Wall Street is not pleased.

Financial Services Forum CEO Rob Nichols on leaked draft of the forthcoming bill by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) to force banks to hold more capital: “According to a number of domestic and foreign regulators, academics and analysts, banking system capital is currently at or near record highs. Raising required capital to comically high levels will severely restrict banks’ ability to lend to businesses and job creators. 

“To be clear, no institution should be too-big-to-fail, and taxpayer money should never be used to rescue financial firms from their mistakes. But with economic growth at 0.4 percent last quarter and 23 million Americans out of work or under-employed, we should not restrict the ability of businesses to access the credit needed to accelerate economic growth and job creation.”

Obviously there is no such thing as “job creators” but stepping past the buzzword, why are the reserve requirements comically high? Possibly because the bill would substantively change the banking system which Wall Street always thought Washington was joking about.

Senate staff are reviewing a draft of banking legislation that would raise equity funding requirements for financial institutions, pull the United States out of the Basel III accord, and further restrict the Federal Reserve’s ability to bail out the shadow banking sector…

The draft calls for bank regulators to look to the 19th century—before the Federal Reserve, deposit insurance and the income tax—when setting capital equity levels, and seems to rule out risk-weighting as a way to dilute the rules. By that standard, none of America’s largest banks would have reached the bill’s proposed minimum capital requirement of 10% in the second quarter of last year. And that’s not even counting the additional 5% capital surcharge on banks with more than $400 billion in assets.

And that’s the point. By requiring the high reserves the Too Big To Fail banks are incentivized to break up rather than lose their precious profits gained from having dangerously low reserves. Dangerous because if you have low reserves and you bet wrong you might not have enough to cover your loses – a lethal margin call.

The big question is can Wall Street kill the bill before it starts gaining momentum? Now may be their last chance as the bill has been drafted and begins the roll out process with the sponsors doing media tours to campaign for the bill and interested groups taking up the cause. If this legislation gains steam it might be impossible to stop as even the House may be shamed into passing it.