In the wake of the economic downfall, and the government having to bailout financial super houses last year, regulators are trying their best to ensure it does not happen again. We even have US senators John McCain and Maria Cantwell pushing for this reinstatement. The Glass-Steagall Act was repealed in 1999 (called the Gramm-Leach-Bliley Act) and led to the formation of massive financial firms such as Citigroup and bank of America, which conduct retail banking, trading and insurance businesses under one roof.

Great Seal
Great Seal

If this is passed then financial firms would no longer be able to offer investments while running as a commercial bank. This was how it was when the first regulation was passed after the Great Depression in 1933.  We haven’t had a financial collapse as severe as this one since Glass-Steagall was repealed.

Some Possible Outcomes Of This Legislation

If the law is reinstated, it will have the most impact on mega-banks that have multiple subsidiaries rolled up into one corporation.  If you take JPMorgan Chase, for example, they would have to separate Chase Bank from acquired investment bank Bear Stearns under this new law. Bank of America® would have to split from Merrill Lynch, after only acquiring them last year in the climax of the financial meltdown. Also, Goldman Sachs Bank USA, which became a bank holding company (a bank that accepts federally insured deposits) to be eligible for TARP, would have to stop being a bank and focus on investing only.

It is interesting to consider what the outcome for these mega-banks would be, but it is still unclear if reinstating this legislation is much more than a rumor at this point.

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