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TIME TO REVISIT GLASS-STEAGALL? |
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 Return of the Jedi? Glass-Steagall Act Congress and the Senate soon after enacted the Glass-Steagal act which separated commercial banks and investment banks. The logic was that investment banks which engaged in riskier lines of business were also exposed to huge potential losses. That said, the government wanted to (i) protect bank depositors from potential volative losses experienced by investment banks and (ii) to reduce the temptation of investment banks to bilk the public to recoup those losses. After years of lobbying efforts by both commercial banks and investment banks, the Glass-Steagall act was repealed in 1999 by a Republican led Congress. The popular argue for its repeal was that "the era of Glass-Steagall was over 60 years ago. Times have changed". TodayDuring the current economic melt down investment banks and commercial banks have earned huge fees and bonuses from investments in mortgage-backed securities, credit default swaps and private equity loans. When then investments did not pay off certain firms have gone bankrupt or faced near-bankruptcy. Those who were able to stave off bankruptcy did so through TARP funds provided by taxpayers with the argument being that certain firms were too big to fail and we ran the risk of becoming a third world country if government did not offer bail out funds. In recent weeks, President Obama has called for more oversight and transparency as it pertains to the financial industry. The solution may be to (i) reinstitue the Glass-Steagall Act, separating investment banks and commercial banks and (ii) strongly enforce Sarbanes-Oxley which forces companies to attest that their financial statements are true and accurate. Below is the link to the article where President Obama calls for Wall Street reform. The arguments he makes are almost identical to those made by Congress, and the public, in the 1930's. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20090225&id=9643657 |
