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Senators Call for Reinstatement of Glass-Steagall Act

Source: WSJ

Posted on 17 Dec 2009

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Senators Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) plan legislation to reinstate the Glass-Steagall Act of 1933, which separated walls between investment and commercial banking.

There’s no indication that the bill might eventually become law, but after comments made Tuesday by House Majority Leader Steny Hoyer (D., Md.), in which he said such a proposal might get a look in the House. That’s enough to drive bankers bonkers.

The walls put up by Glass-Steagall were mostly stripped away by the Gramm-Leach-Bliley Act of 1999. The House passed a bill last week that would penalize large banks through fees, capital requirements, and potential limits on business. The bill didn’t reinstate Glass-Steagall, but it did give regulators the power, on a case-by-base basis, to separate banking and commerce operations at specific banks if certain concerns arose.

Many have cited the repeal of Glass-Steagall as key element in exacerbating the financial crisis. Federal Reserve Chairman Ben Bernanke has called that view into question. “I don’t think that if that law had been in place it would have had much effect on this particular crisis,” he said in an interview with Time magazine published today. “Investment banks manage to go bankrupt through their investment-banking activities, commercial banks manage to go bankrupt through their commercial-banking activities. It wasn’t really the case that the combination was the major problem.”

Sens. Cantwell and McCain are calling their bill the “Banking Integrity Act of 2009.”