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Dec. 16 (Bloomberg) -- U.S. Senators John McCain and Maria Cantwell proposed reinstating the Depression-era Glass-Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.
"Under our proposal, too-big-to-fail banks would be forced to return to the business of conventional banking, leaving the task of risk taking or management to others," McCain, an Arizona Republican, said at a Washington news conference. A former bank regulator said splitting up companies is "crazy."
McCain and Cantwell, a Washington Democrat, join other lawmakers in Congress proposing to reinstate the 1933 law, repealed a decade ago by the Gramm-Leach-Bliley Act that led to a rise in conglomerates including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. active in retail banking, insurance and proprietary trading. Legislation to reinstate the ban was introduced today in the House.
Under the Senate legislation, financial firms operating commercial banks and investment houses will have to decide whether to focus on commercial banking or investment banking. It would ban commercial banks from engaging in insurance activities. Cantwell said the companies would get a year from enactment to comply with the law.
"Trying to split them up is crazy," John Douglas, a former general counsel at the Federal Deposit Insurance Corp. who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York, said in a telephone interview. "The integration of the securities and banking function came about because of the need of large corporate customers to have integrated banking and securities services."
The Senate legislation would require New York-based JPMorgan to give up trading operations acquired from Bear Stearns Cos. and split from Chase, according to a summary from Cantwell and McCain. Bank of America, the largest U.S. bank by assets and deposits, and Merrill Lynch & Co. would need to separate.
Goldman Sachs Group Inc. could no longer be a bank-holding company that accepts federally insured deposits, according to the summary. It was approved as a bank-holding company during the credit crisis last year to gain Federal Reserve support. Citigroup would have to shed its multiple non-commercial banking affiliates.
"Wall Street firms are about to post soaring end-of-the-year profits and bonuses, while Main Street suffers and wonders when they will have their recovery," Cantwell said.
Cantwell and McCain said the profits touched off public anger toward bankers, while the president of the Independent Community Bankers of America said a "growing realization" has emerged in Congress the repeal may have been a mistake.
"We cruise along for 80 years without a major calamity infecting the entire financial system and then less than eight years after the repeal of Glass-Steagall we have a financial meltdown in this country," Camden Fine, president of the Washington-based trade group for about 5,000 smaller U.S. banks, said in a telephone interview. "That's no accident."
Representative Maurice Hinchey, a New York Democrat, introduced a version of the legislation a day after Majority Leader Steny Hoyer told reporters renewal of Glass-Steagall "is certainly under discussion" by lawmakers.
"The repeal of Glass-Steagall has exposed the U.S. economy to a level of risk that is simply unacceptable," Hinchey said in a statement. "This bill reinstates a common-sense protection that will help ensure average Americans are not taken advantage of by banks and helps mitigate the risk of another financial meltdown."
The House last week passed 223-202 a bill overhauling U.S. financial rules in response to last year's $700 billion taxpayer-funded bank bailout and in an effort to prevent future crises. The legislation included government authority to break apart large, healthy firms whose size threatens the economy and to seize and unwind failed companies whose collapse in bankruptcy could disrupt the financial system. The House didn't incorporate a proposal to reinstate Glass-Steagall.
The Obama administration said the House legislation "takes many of the steps" needed to avoid future crises in the financial system, White House spokesman Robert Gibbs said today, without commenting on the Glass-Steagall proposals.
In the Senate, the members of the Banking Committee are crafting similar legislation, incorporating ideas proposed in June by President Barack Obama. Cantwell said she and McCain will try to advance their legislation even if it's not incorporated into the Senate financial overhaul bill.
Senator Christopher Dodd, the Connecticut Democrat who leads the committee, said the proposal is "interesting" and didn't think he'd add it to his legislation.
"There are other things we can do to break them up, but I'm not sure that's the right answer," Dodd said today in an interview.
"I think it makes a lot of sense," Senator Richard Shelby, the committee's top Republican, told reporters today. "I don't know if it will ever happen."
To contact the reporter on this story: Alison Vekshin in Washington at email@example.com.
To contact the editor responsible for this story: Alec D.B. McCabe at firstname.lastname@example.org
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