Congress Weighs Restoring Wall Between Banking, Insurance

By | December 17, 2009

Financial giants such as Goldman Sachs Group could be broken up under two bills introduced in the U.S. Congress Wednesday, one with the backing of former Republican presidential nominee John McCain.

Both would reinstate the 1930s-era Glass-Steagall laws that barred large banks from affiliating with securities firms and engaging in the insurance business. Those limits were largely repealed in 1999, a high-water mark for deregulation.

“It is time to put a stop to the taxpayer financed excesses of Wall Street … This country would be better served if we limit the activities of these financial institutions,” McCain said in a statement with Democratic Senator Maria Cantwell.

Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo — to spin off investment and insurance operations, said Demos, a progressive think tank in New York.

A similar measure was offered Wednesday by six House Democrats, including Representatives Maurice Hinchey, Peter DeFazio, Jay Inslee and John Tierney.

The bills come as Congress debates a sweeping overhaul of financial regulation more than a year after a severe banking and capital markets crisis rocked economies worldwide.

“Restoring Glass-Steagall may have populist appeal, but it is hard to see how one finds 60 votes for it” to win passage in the Senate, said financial services policy analyst Jaret Seiberg, at investment firm Concept Capital.

“This will be painted as a jobs killer, especially for New York. Plus, conservatives in both parties will balk at having the government forcibly break up private companies,” he said.

The House approved a regulatory reform bill last Friday that would empower a new systemic risk regulator to order the break-up of risky financial firms in extreme circumstances.


Neither the House reform bill, nor legislation being debated in the Senate, would reinstate Glass-Steagall.

But House Democratic Leader Steny Hoyer told reporters Tuesday at his weekly news conference that such a move was “certainly under discussion … As someone who voted to repeal Glass-Steagall, maybe that was a mistake.”

The 1933 Glass-Steagall laws were adopted at the same time the Federal Deposit Insurance Corp was set up. Both reforms came in the Great Depression, when thousands of banks collapsed, wiping out the savings of millions of Americans.

Glass-Steagall was largely repealed in 1999 under the Gramm-Leach-Bliley Act during the Clinton administration amid lobbying pressure from bankers, including those keen to merge the financial firms that later came to comprise Citigroup.

Today, supporters of stronger regulation of Wall Street and the banks say it is no coincidence that America has suffered a series of financial crises since deregulators gained the upper hand politically in Washington in the 1980s.

“The repeal of Glass-Steagall has exposed the U.S. economy to a level of risk that is simply unacceptable,” Hinchey said

“Congress ignored history in 1999 when it repealed the Glass-Steagall Act and the American people have been forced to pay the price while bailing out these mega-banks, which should have never existed in the first place,” he said.

Opponents dispute this and say restoring Glass-Steagall might not have prevented last year’s crisis or others.

Citigroup, JPMorgan Chase and Morgan Stanley declined to comment. No immediate comment was available from Goldman Sachs and Wells Fargo.

(Additional reporting by Juan Lagorio and Jonathan Spicer in New York; Editing by Dan Grebler)

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