Son of Glass Steagall? Banking Firewall Could Make a Comeback

In politics, events usually come full circle.

That just might be the case for the Glass-Steagall Act, a depression-era law that separated investment houses and insurance companies from traditional banks. But Congress pulled the plug on Glass-Steagall in 1999, after heavy lobbying by Wall Street.

Well, Wall Street won the day and nowadays, it’s routine for banks like Citigroup (Stock Quote: C) and Bank of America (Stock Quote: BAC) to offer banking, investing and insurance services under one big umbrella.

But a lot has happened in the 10-years since Glass-Steagall was shelved. Call it coincidence or not, but since the original act in 1933, there hadn’t been a serious, sustained economic calamity throughout the remainder of the century. But only eight years after the repeal of Glass-Steagall, the bottom fell out of the U.S. financial system, and plenty of critics pointed at the absence of a good regulatory firewall to keep banks and other creditors from taking big risks.

Now two U.S. Senators, Sen. John McCain from Arizona and Sen. Marie Cantwell from Washington, are looking to get Glass-Steagall back on track. A look at the bill on Sen. McCain’s web site emphasizes the restoring of safeguards that “protect Americans’ deposit money from being used in Wall Street’s risky speculation”.

Remarked Sen. Cantwell;  “America can’t afford another financial crisis,” said Cantwell.  “With big banks using depositor money to gamble on Wall Street, it’s only a matter of time.  Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes. We must return stability, security and confidence to commercial banking for the American public.  The first step is this bill.”