The health care bill may take over 1,000 pages to transform our health care system, but a single page proposal to reinstate the Glass-Steagall Act of 1933 could prove to be just as trans-formative in the financial industry.
The new proposal, which has gained a significant following in the senate, would work to reinstate a lot of the laws that were repealed by the Gramm-Leach-Blilely Act of 1999. The 1999 law did away with many of the most important aspects of the Glass-Steagall Act, including the prevention of traditional deposit banks from offering proprietary trading, insurance, and brokerage services. This separation of investment and retail banking was initially imposed by Glass-Steagall as an effort to prevent another recession in the post-Depression era.
“War on Wall Street”
If the McCain-Cantwell proposal is passed into law, it could mean the dissolution of banking giants such as Goldman Sachs Bank USA and Bank of America®/Merrill Lynch. In order to separate their retail and investment banking arms, these bank will be required to either create separate companies to do their investment banking, or relinquish their status as holding companies, meaning they would no longer be eligible for FDIC insurance. Some say that this is opening up a war with Wall Street firms who will fight any such act with everything they have.
Critics of the proposal say that what is needed is not a reinstatement of the old act but a new act that more specifically addresses the problems of today’s banks, most significantly the way in which the financial crisis was able to spread so quickly throughout the entire financial industry. One way to do this is to increase regulation on commercial banks, while allowing hedge funds freedom as long as they adhere to capital guidelines.