Two senators, one from each party, called Wednesday for breaking up large financial firms that perform both commercial and investment banking, adding a wrinkle to already difficult talks in the Senate on how to regulate Wall Street.
Sens. John McCain, the former Republican presidential candidate from Arizona, and Sen. Maria Cantwell, a Washington Democrat, introduced legislation that would prohibit commercial banks from undertaking brokerage activities.
Such a ban would strike directly at such institutions as Goldman Sachs, JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co., which engage in both commercial and investment banking.
Democrats introduced a similar bill in the House on Wednesday.
"Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes," McCain said in a statement. "We must return stability, security and confidence to commercial banking for the American public."
The Senate proposal, bolstered with McCain's backing, comes as the Senate Banking Committee seeks to bridge differences within the committee on a sweeping overhaul of financial regulations. Though the House passed its own sprawling regulatory bill last week, the Senate is not expected to have one finished until March.
Lobbyists, aides and senators say committee members are considering a proposal that could resolve one of the legislation's major sticking points: a proposed Consumer Financial Protection Agency pushed by the Obama administration but vigorously opposed by banks.
Under the proposed compromise, the agency would have authority to write consumer regulations covering lending and other bank transactions. But enforcement of the regulations would be left to specific banking regulators, not to the consumer agency. The proposal was described by people who requested anonymity because of the discussions are still in flux.
They said the proposal had yet to be embraced by Banking Committee Chairman Christopher Dodd, D-Conn., or the committee's top Republican, Richard Shelby of Alabama, and could be scrapped.
The House-passed version gives the consumer agency both regulation writing and enforcement powers.
Dodd has been a strong advocate of an empowered consumer agency, but it has skeptics, even among Senate Democrats. Dodd has been working directly with Shelby on that aspect of the bill, but has not made a breakthrough.
"From the beginning I've always thought that we should not create a stand-alone consumer financial authority," Shelby said this week. "Safety and soundness (of banks) should be number one."
Still, other senators said they expected a compromise, not an impasse, over the issue.
"The fact that the two of them are working one on one with their staffs on that issue gives me some hope that we may end up with something that would be in the middle of the road by the time its completed," said Sen. Bob Corker, R-Tenn., a member of the Banking Committee.
Bank lobbyists paid close attention to a House vote last week that narrowly defeated an attempt to replace the consumer agency with a weaker council that would coordinate consumer regulations but leave rule writing and enforcement to existing bank regulators. The financial industry supported that measure.
The idea of splitting the authority of a consumer agency appears to be another bargaining position, a fall back if Senate Banking Committee members don't embrace an even less powerful council.
McCain and Cantwell, in calling to separate commercial from investment banking, have introduced yet another element for banks to oppose in the regulatory debate.
"The better solution is to modernize the regulatory framework to account for the modern financial services industry rather than returning the industry and consumers to the 1930s," said Scott Talbott, the chief lobbyist at the Financial Services Roundtable, an industry group that represents some of the largest Wall Street institutions.
But Rep. Maurice Hinchey, D-N.Y., one of seven Democrats to introduce a House version of the bank-busting bill on Wednesday, said Congress never should have undermined the Depression-era law.
"Congress ignored history in 1999 when it repealed the Glass-Steagall Act," he said, "and the American people have been forced to pay the price while bailing out these megabanks, which should have never existed in the first place."