Mosby also recommends that there be retention of risk for lenders in all securitization processes, to avoid the sort of mortgage repurchase mess Bank of America is working through.

Mosby has directly addressed what he sees as the core of the systemic "too big to fail" problem: "We believe forced collateralization and limitations on concentrations can help to minimize this risk, which is the primary reason any Large Cap Bank failure has been deemed too risky in the past," he wrote. He added that the finalization of orderly liquidation processes by the large banks, known as "living wills," along with agreement on the processes by regulators, could be "the final gesture that removes the too-big-to-fail implied guarantee."

The large banks can, and hopefully will, present clear and logical alternatives to end the perception of implied guarantees of government bailouts, once and for all.

The politicians need to think twice before breaking up our largest banks. Out of the 52 largest banks worldwide, ranked by total assets, only six are U.S. banks. That is a rather small number, considering that the U.S. is still the world's largest economy. Only two U.S. banks are included among the top 10. JPMorgan Chase is the world's eighth largest bank, and Bank of America ranks ninth.

If Brown-Vitter were to pass, it would possibly succeed eventually in its goal of forcing the largest U.S. banks to break up, but in the meantime, the banks would be struggling to push loan rates high enough to turn a decent profit on their higher capital levels, which might lead to at least a temporarily stifling of credit availability. That could be quite a brutal shock to the economy.

Rafferty Capital Markets analyst Richard Bove took a much tougher tone last month, after a draft version of the Brown-Vitter bill was leaked, calling the bill "anti-American legislation." In a note to clients, Bove wrote on April 8 that passing Brown-Vitter would "defeat the Federal Reserve's current monetary policies and create a recession of unlimited duration."

"What is almost laughable about this legislation, if it was not so critical, it is using a faulty view of American history as justification for its passage," Bove wrote. "It harks back to a time when this country's financial system was replete with Depression and bank failures as the example of what the country should return to."

According to Bove, forcing the big U.S. banks to shrink creates a vacuum that "allows the Chinese banks to grow at a faster rate into areas of global finance previously dominated by Americans," which can hasten an eventual switch to the yuan as the world's reserve currency, instead of the U.S. dollar.

When analyzing the requirements and effects of Brown-Vitter, Bove wrote that the big six banks would need to raise $500 billion in common equity, while the "the rest of the selected parts of the industry would have excess equity."

The problem with this scenario, according to Bove, is that "the big companies will not be able to raise this equity . . . and the small companies will not be able to absorb the excess loans that would have to be divested by the big banks."

That's a disruptive recipe for a terrible recession or depression as credit dries up, and possibly an even bigger government bailout in order to shore up the economy.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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