Glass-Steagall sequel would be a horror show for banking bigs

McCain-Cantwell proposal aims to break up large financial conglomerates

Dec 29, 2009 @ 4:16 pm

By Hilary Johnson

What would the banking universe look like under a Glass-Steagall redux?

A one-page bill introduced this month by Sen. John McCain, R-Ariz., and Maria Cantwell, D-Wash., would essentially reinstate the Act, forcing banks to spin off their investment banking and insurance operations. While the bill is short on details, there's no shortage of speculation in the financial community over what will happen if the legislation becomes law.

In fact, an online survey this week showed that 44% of 749 respondents believe that Bank of America would be most affected if Glass-Steagall were revived — primarily because of BofA's acquisition of Merrill Lynch. If the bill, which has added four co-sponsors and which mirrors a similar proposal in the House, were to be passed, these industry watchers speculate that Bank of America would have to jettison Merrill.

Respondents to the online survey, which ran on TheStreet.com, also cited Citigroup and JPMorgan Chase & Co. as the large banks that would be most affected by Glass-Steagall II.

Jeff Harte, an analyst who covers Bank of America, JPMorgan and Citigroup for Sandler O'Neill + Partners L.P., argues that's it's too soon to engage in much speculation on the subject. Passing the bill — then implementing it — would be a sizable challenge, he said, given the 10 years that have passed since Glass-Steagall was repealed.

“If there are proposals floating around, you certainly can't ignore it,” Mr. Harte said. “But it just seems to me that with the amount of integration that has gone on at the large banks with investment banks in them, unwinding those organizations domestically would be a challenge. And then from an international, competitive standpoint, it would probably make the U.S. banks weaker relative to their peers.”

Backers of the bill say reviving Glass-Steagall would diminish the investment banking mentality that has come to dominate the thinking of many bank executives in recent years. In addition, breaking up financial conglomerates might prevent a single bank from becoming so large that it threatens the entire U.S. economy.

But Mr. Harte pointed out that it's far from clear that Glass-Steagall, which was itself a response to the excessive speculation that helped trigger the Great Crash of 1929, would have prevented this latest financial crisis.

“The thing is that the financial crisis we're in may not necessarily be a function of banks having investment banks,” he said. “It's as much a housing bubble and risk management failure as anything. A lot of banks are failing that don't have internal investment banks. It would seem to me that reimplementing a 70-plus-year-old limitation on corporate structure is not the right answer.”

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