Glass-Steagall's ghost

21 January 2010 By Hugo Dixon Follow @hugodixon

Whatever the precise details of the president’s proposed new crackdown on big banks and their proprietary trading, it doesn’t look pretty for Wall Street. Even if there are no forced breakups, a return of the spirit of GlassSteagall could curb business practices and profits.

This content is for Subscribers only

Context News

President Barack Obama is to unveil plans to limit the size and trading activities of financial institutions later on Jan. 21, according to media reports.

Reuters quoted an unnamed senior Obama official as saying: "The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with the House and Senate to work this into legislation."

Obama will speak at 11:40 a.m. EST (1640 GMT) following a meeting with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favours curbing big financial firms to limit their ability to do harm.

Obama separately told ABC News in an interview that the surprise defeat of his Democratic Party candidate in Massachusetts on Tuesday reflected anger over bankers' bailouts and doubledigit unemployment rates.

The Wall Street Journal said that the goal of Obama's proposal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces.

The WSJ also reported that administration officials said they want to place "firewalls" between different divisions of financial companies to ensure banks don't indirectly subsidize "speculative" trading through other subsidiaries that hold federally insured deposits. The rules could also keep banks out of the business of running hedge funds, investing in real estate or private equity.

The newspaper also quoted an aide as saying that, while the proposal wouldn't resurrect the exact limits put in place by the Depressionera GlassSteagall Act, which separated commercial and investment banking, it would return to the "spirit of GlassSteagall".

Email a friend

Please complete the form below.

Required fields *