The rollout of legislation this week that would rip up much ofthe Dodd-Frank Act marks a pivotal moment for Republicans' effortsto overhaul post-crisis financial rules.

It's also an opportunity for Democrats to push an agenda thatGOP lawmakers and finance executives are less keen to talk about:breaking up Wall Street megabanks.

The Republican bill, drafted by House Financial ServicesCommittee Chairman Jeb Hensarling, has a lot that banks like. Itwould repeal the Volcker Rule, which restricts lenders from makingspeculative bets unless they use clients' money. And it wouldreduce the frequency of burdensome exams that determine whetherbanks can pay shareholder dividends. House Speaker Paul Ryan ofWisconsin told reporters on Wednesday that he'll seek a vote on themeasure “as quickly as possible” after it's approved byHensarling's committee.

But some Democrats have started strategizing on ways to leverageHensarling's bill to force Republicans to take a stand oncontroversial issues. That includes bringing back some version ofthe Glass-Steagall Act, the Depression era-law that kept investmentbanking and consumer lending separate for more than six decadesuntil it was scrapped in 1999. A handful of lawmakers blame therepeal for contributing to the 2008 meltdown, an argument that WallStreet flatly rejects.

“A total breakup of the banks is my goal, but I'm not averse tomaking compromises,” said Rep. Mike Capuano, a MassachusettsDemocrat who is considering proposing a Glass-Steagall amendment toHensarling's legislation. “Any progress we can make toward theconcept of separation is better than what we have.”

Capuano and others who want to see banks shrunk have beenemboldened by recent statements from Trump administrationofficials, including White House economic adviser Gary Cohn.Earlier this month, the former top executive at Goldman Sachs GroupInc. said he would support some version of Glass-Steagall beingbrought back.

The prospect of a politically divided Congress passing any majorfinancial services bill, particularly one that would force banks todramatically rethink their business models, is a long shot. Still,having to register a vote on dismantling giant lenders presentsrisks for individual lawmakers, especially those who rely onpolitical contributions from the finance industry.

While Republicans included a reinstatement of Glass-Steagall inthe platform they approved during their national convention inJuly, it hasn't been a key of the party's agenda on Capitol Hillthis year.

Just Rhetoric?

“Anything that gets Republican members on the record about wherethey stand is meaningful,” said Joe Valenti, director of consumerfinance at the Center of American Progress, a progressive thinktank. “It could be useful to see whether this is just rhetoric orwhether there could be actual, serious debate on a proposal.”

Getting drawn into a fight over Glass-Steagall is somethingfirms like JPMorgan Chase & Co., Citigroup and Bank of Americawould like to avoid, as the issue illustrates the threat ofPresident Donald Trump's conflicting economic messages. While Trumphas pledged to ease financial regulations that he says arecrippling growth, he got elected in part due to his populistanti-Wall Street rhetoric on the campaign trail.

The House Financial Services Committee is holding a hearing onHensarling's bill Wednesday with a panel vote on the legislationplanned for next week, giving Democrats a chance to offeramendments.

“Dodd-Frank has been a bigger burden to enterprise than allother Obama-era regulations combined,” Hensarling said at thehearing. “There is a better way.”

Brian Gardner, a financial policy analyst at Keefe Bruyette& Woods, says a bigger threat to banks will emerge onGlass-Steagall if the Senate takes up a financial rulesoverhaul.

“It's mostly a diversion at this time,” Gardner said in aninterview. “But it could be a much bigger risk in the Senate whereDemocrats have an outsized influence and could decide to hold otherfinancial measures hostage until they get a vote onGlass-Steagall.”

It was during a private meeting with senators that Cohn offeredhis Glass-Steagall endorsement, people who heard his comments havesaid.

When asked to elaborate, Cohn said he's backed a clearseparation between investment banking and consumer lending foryears, adding that there are cultural differences between the twobusiness lines, said the people who asked not to be named becausethe meeting was private.

His comments flustered bankers and their lobbyists, many of whomplaced frantic calls to the White House and congressional officesseeking more details.

Banker Confusion

Part of the frustration banks have is confusion over what policymakers mean when they promote a separation of investment andcommercial banking.

The phrase “21st century Glass-Steagall” was first coined by Se.Elizabeth Warren, a staunch liberal. But it has since been adoptedby Trump and members of his administration. Treasury SecretarySteven Mnuchin told the Financial Times last week that one approachfor implementing a modern version of Glass-Steagall could bewalling off units of banks, instead of breaking them up.

“Anytime I hear this term 21st Century Glass-Steagall, I askwhat it is, and I have yet to have anybody really tell me,”Citigroup CEO Mike Corbat said during an April 13 earnings callwith investors and analysts. “I have yet to have anybody reallyexplain to me what value there is.”

The Wednesday hearing on Hensarling's bill, dubbed the FinancialChoice Act, may not provide Corbat or other bank CEOs much clarity.And even if an amendment was added that brings back Glass-Steagall,the legislation still isn't likely to win support from manyDemocrats.

“I just can't vote for this bill, it's just so bad,” said Rep.Brad Sherman, a California Democrat. “This isn't the FinancialChoice, it's the wrong choice.”

Bloomberg

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.