Reviving Glass-Steagall Means Escalating 'War' on Wall Street

A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc.

By Alison Vekshin and James Sterngold

(Bloomberg) — A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc. (C)

Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that's both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.

Those walls came down with passage of the Gramm-Leach-Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.'s (BAC) acquisition of Merrill Lynch & Co.

"The impact on Wall Street would be severe," Wayne Abernathy, an executive vice president at the American Bankers Association, said in a telephone interview.

Resurrecting Glass-Steagall goes beyond the array of new regulatory powers that President Barack Obama has proposed to fix the financial system. It has also sparked debate among academics, regulators and legislators over whether the Depression-era law could have prevented the crisis of 2008 or might help avoid future ones.

'No Difference'

"If you look at what happened, with or without Glass-Steagall, it would have made no difference," said H. Rodgin Cohen, chairman of New York-based law firm Sullivan & Cromwell LLP, who represented one side or the other in more than a dozen transactions stemming from the financial crisis last year, including the rescues of Bear Stearns Cos., Fannie Mae, Wachovia Corp., and American International Group Inc. (AIG)

Cohen and others say the law wouldn't have saved Bear Stearns or Lehman Brothers Holdings Inc., both of which were pure investment banks, from collapse. And the government would not have been able to enlist JPMorgan Chase & Co. (JPM) to take on the assets of Bear Stearns or allow Goldman Sachs Group Inc. (GS) and Morgan Stanley to become bank holding companies, giving them access to the Federal Reserve's discount window.

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