Glass-Steagall Sequel: Which Bank Would Suffer? - TheStreet

WASHINGTON D.C. (

TheStreet

) -- The populist rage that has pitted Washington D.C. versus Wall Street all year long is still in full vitriolic show as 2009 heads to a close.

Congress is now looking at a proposal to bring back the 1933 Glass-Steagall Act, which once separated commercial and investment banking, a move that could in one fell-legislative-swoop undo the massive merger-and-acquisition activity that typified the banking sector over the past decade.

Senator John McCain (R-Ariz.) -- maybe still smarting from the impact Wall Street woes had on his presidential fortunes -- and Senator Maria Cantwell (D-Wash.), have introduced a proposal to prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages.

Clearly, a legislatively mandated untying of merger-happy Wall Street institutions would change the very nature of firms like

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

. For example, would the Bank of America/

Merrill Lynch

deal be undone with a congressional snap of the fingers?

While it is too early to prognosticate on the fate of this contentious Senate proposal, two things are already certain.

One: bringing back some form of Glass-Steagall now would not do any good for the now-defunct

Bear Stearns

and

Lehman Brothers

. And, notably, both were investment banks specifically, and did not fail due to an overly aggressive merger of commercial and investment activities. Two: the financial industry will fight any legislative change of this magnitude tooth-and-nail.

Financial lawyers and lobbyists have already pointed out that such a change would have made it impossible for

JP Morgan

(JPM) - Get Report

to rescue Bear Stearns assets, or for

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

to become bank holding companies.

Then again, Senators McCain and Cantwell could argue that Morgan Stanley and Goldman would never have needed to become bank holding companies had they not helped to run Wall Street and the U.S. economy into the ground in the first place.

Also, the financial industry bailout and the Wall Street pay package saga that seems to include a new episode each week -- usually starring

AIG

(AIG) - Get Report

-- make it impossible to not at least take these congressional overtures seriously, since rage against the capitalist machine is still strong.

The McCain-Cantwell proposal has already enlisted four co-sponsors. A similar bill has been introduced in the U.S. House of Representatives by Maurice Hinchey (D-N.Y.). Congressional power brokers including Barney Frank (D-Mass.) have already voiced support for re-implementing Glass-Steagall on a limited basis.

Financial industry proponents of bringing back Glass-Steagall argue it would be an act of creative destruction, and the more nimble banks would not only survive but become stronger. Maybe so: let's raise a New Year's glass of champagne to the glass-half-full approach.

Still, if Washington winds of change are not all bluster when it comes to Glass-Steagall, which big bank do you think would suffer the most in trying to reemerge from this banking industry act of creative destruction?

-- Reported by Eric Rosenbaum in New York.

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