Senators John McCain (R-AZ) and Maria Cantwell (D-WA) have introduced a new piece of legislation in congress that would effectively bring back the Glass-Steagall Act, which would force the breakup of Citigroup (NYSE: C), JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and other large institutions that practice both commercial and investment banking.
There’s a growing populist movement to re-instate the firewall that prevented commercial banks from engaging in investment activity. Many believe that the participation of commercial banks in investment banking activities was one of the major causes of the financial crisis that brought forth the worst recession in modern history.
The new legislation would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. If the legislation passed it would force large commercial banks to sell their investment banking assets.
Bank of America would no longer be able to own Merril Lynch and other major institutions would be forced to cease their investment banking operations. The legislation would have also made it impossible for JP Morgan to rescue assets from Bear Stearns and would have prevented Goldman Sachs and Morgan Stanley from becoming bank holding companies.
The financial industry will certainly fight any legislative change of this magnitude with the maximum amount of pressure that its lobbyists can put on.
Although the legislation would minimize some of the risks that large commercial banks are taking on, its not a panacea. The return of Glass-Steagall would have not prevented the collapse of either Bear Stearns or Lehman Brothers, which were both specifically investment banks and did not fail because of a merger between commercial and investment banking activities.