Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.
If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation's biggest -- those now commonly referred to as "too big to fail" -- would be broken up. The Obama administration opposes the measure.
The amendment's five co-sponsors -- Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts - want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama's chief economic adviser.
The five congressman all voted against the repeal then -- and now they want it back.
Former Federal Reserve Chairman Paul Volcker is one of a number of financial luminaries calling for at least a partial return to Glass-Steagall. The Wall Street Journal's editorial page also endorsed the concept in a recent editorial as a way to "reduce moral hazard" and "limit certain kinds of risk-taking by institutions that hold taxpayer-insured deposits."
The law's repeal ushered in an era marked by big banks getting even bigger. The country's four largest -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo - now control more than half of the nation's mortgages, two-thirds of credit cards and two-fifths of all bank deposits.
And because their deposits are taxpayer-insured, there's a growing concern that they will feel overly confident about making risky bets through their investment arms because they know that should they suffer huge losses, taxpayers will ultimately be there to bail them out.
The five Democrats face big obstacles, including their own leadership and the Obama administration.
Three weeks ago on Capitol Hill, Treasury Secretary Timothy Geithner said: "I would not support reinstating Glass-Steagall. And I don't actually believe that the end of Glass-Steagall played a significant role in the cause of this crisis."
But in an interview Monday, Hinchey said that "some of the people around our president are not giving him the appropriate advice." He added: "And contrary to that, the wrong advice is coming forward -- and being implemented."
DeFazio has called for Geithner to resign.
In a Nov. 17 opinion piece in the Detroit Free Press, Conyers wrote:
Without Glass-Steagall serving as a critical check on the power of banks, the floodgates of speculation were opened. The banks leveraged personal savings accounts to trade in exotic securities and assets. Banks, insurance companies, and investment firms merged at an astounding pace. No longer content to simply finance home mortgages, these new hybrids began creating and selling securities based off of the speculative value of shaky mortgages. The banks took on more risk because risk was profitable. No one paid much attention to what would happen when the speculation bubble burst.
Conyers also argues that the administration is taking the wrong approach.
Currently, the Obama administration is working with both houses of Congress on legislation aimed at preventing a...major calamity in the banking industry. I am concerned, however, that their preferred method seems to focus on empowering our financial regulators to manage and mitigate some level of "acceptable risk" within the present system, instead of correcting the structural flaws that make a collapse likely to recur.
Conyers and Hinchey point to Volcker, among others, as being on the right side of this debate. In response to reports that the administration is marginalizing Volcker and disregarding his recommendations, Hinchey lashed out: "He's someone we should be listening to. It's very discouraging and annoying and angering to me that someone like him is not being listened to."
But there's a reason for that, of course. As Hinchey said Monday, "I think there is excessive influence of some banks on the legislative process in this Congress."