Glass-Steagall Fans Consider New Assault

Politicians and advocates on both sides of the aisle threaten a return to prohibiting banks from securities activities if the final Volcker rule is deemed too weak.

Five U.S. agencies will finish the Volcker rule tomorrow after more than three years of Wall Street resistance to its limits on trading and investing. Lawmakers and their allies who want to rein in big banks are ready to pounce if it isn’t strict enough.

Politicians and advocates—some Democrats, some Republicans—who blame the 2008 financial crisis on deregulation express concern that the Volcker rule won’t adequately block banks from making risky bets with their own money. If the rule is too weak, they say, it will add fuel to a push to reinstate a Depression-era law known as Glass-Steagall that split banks and securities firms until 1999.

During the congressional debate over Dodd-Frank, President Barack Obama and his administration argued that simply restoring Glass-Steagall was an imperfect response to the financial crisis. They noted that the most troubled investments of the largest banks came through mortgage lending, not trading.

“A huge amount of risk built up outside our banking system, outside the safeguards and protections we put in place in the Great Depression,” Timothy Geithner, who headed the Federal Reserve Bank of New York during the crisis and served as Obama’s first Treasury secretary, said last year in remarks to the Commonwealth Club in San Francisco. “That risk and leverage grew up, built up, very substantially, and when the storm hit, it put enormous pressure on a part of the system that provided about half the credit to the American economy. Nothing to do with Glass-Steagall.”

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