Senator Cantwell joins Senator Warren in introducing new version of Glass-Steagall

http://fortune.com/2015/07/20/glass-steagall-banks/

Senators Elizabeth Warren, John McCain, Maria Cantwell, and Angus King have proposed a new Glass-Steagall bill. The measure would reinstate many of the features of the original Glass-Steagall banking act of 1933, a Depression-era law that prevented commercial banks from taking on business ordinarily done at investment banks. The new bill will also address risky activities that bankers had not dreamed up 80 years ago.

The new Glass-Steagall specifically addresses the governance of banks with insured deposits. The idea is that a bank should not use our deposits in ways that put the bank or the economy at undue risk.

The Democratic presidential candidates are taking sides in the debate. Bernie Sanders and Marvin O’Malley support a new Glass-Steagall. But, according to press reports last week, Hillary Clinton will not, even though the bill addresses the use of derivatives, something she expressed concerns about in November of 2007. Perhaps Clinton is looking ahead to the general elections. But if you are seeking election as a Democratic Party candidate, a failure to endorse Glass-Stegall could be a risky bet of its own—a gamble, perhaps, that money will trump voters in the upcoming Democratic primaries.

The reasons for the new bill are many. In addition to all the arguments of fairness and prudence, there are many practical, boots-on-the-ground reasons Congress should pass it now.

Boards of directors are responsible for setting the risk appetite of a company. And they can’t do that effectively in a firm with wildly different risk attributes. In the last eight years, post-financial crisis, boards at the largest banks that have both significant depository and investment banking arms have had the opportunity to show us they can excel at effectively managing this tricky balance—and they have failed to do that. J.P. Morgan’s JPM -0.23% London Whale trading debacle was just one notable example. Post-crisis, the largest U.S. banks have treated us to a continual stream of operations failures and manipulations du jour. Earlier this month, one head of a systemically important financial institution (SIFI) expressed to me his astonishment at the ongoing ethical lapses. It is impossible to create the kind of safe banks we need as depository institutions if they also engage in unfettered speculation.