Red Letter Day: Repeal of Glass-Steagall 10-years Old

Ten years ago today US President Clinton delivered the coup de grace to the Glass Steagall Act, which had in any event been diminished by 1000 cuts by officials in the prior couple of decades.

Many observers attribute a good part of the US financial crisis to the repeal of the Glass-Steagall prohibitions preventing a cross fertilization of investment and commercial banking functions.

Contacts in Washington report that efforts to repeal the repeal is gaining momentum. In the Senate, Banking Committee Chairman Dodd proposed earlier this week that the government should have the power to break up large institutions "as a very last resort."

In the House, the focus is on the Financial Services Committee. Chairman Frank has proposed giving the Federal Reserve the power to identify those bank holding companies who's size threatens financial stability to shrink assets and/or refrain from certain activities. One committee member wants to amend Frank's bill to allow the Fed to re-impose Glass-Steagall prohibitions on a case-by-case basis.

The chairman of the capital markets subcommittee wants to allow the break up of any large firm whose size and risk-taking poses systemic risk. Frank is sympathetic to both modifications and expects that they will be approved.

It is not immediately clear when the bill will get out of the committee and some amendments will be proposed, but the point is the general direction of movement is clear. Although European officials have taken the lead, the idea that too big to fail is too big is gaining adherents in the United States. That said, the uncertain regulatory environment has not discouraged investors from buying US bank shares. IXM, the Financial Select Sector Index, the basis for the ETF XLF has appreciated by nearly 10% since Nov 2, recouping more than three-quarters of the 12.3% slide seen in the second half of October.

For more on the Breaking up of US Banks read 'Breaking Up is Hard to Do'