Obama Plan Has Shades of Glass-Steagall Act

By Steven Sloan and Cheyenne Hopkins

Though administration officials are on record as opposing the resuscitation of the Glass-Steagall Act, President Obama’s proposal last week to curb growth and limit risk taking reinforces core concepts of the Depression-era legislation. The White House proposal does not go as far as the 1933 law that separated commercial and investment banking — it would still allow banks to underwrite securities, among other things — but observers said it is strongly headed in that direction. “You saw coming out of the rescue the government provided a safety net to financial institutions that they used and they have in recent months started making considerable profits off their proprietary trading for themselves, not for their clients,” Goolsbee said. “That is certainly a factor in convincing a lot of people that we’ve got to make sure that issues like that are not going to be pervasive going forward.” Such moves strike at the heart of what Glass-Steagall tried to accomplish. “It aims at separating commercial banking and investment banking,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. “Some of the crisis firms like Bear Stearns and Lehman Brothers were very invested in proprietary trading and relied on hedge funds. They owned banks.”

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