Getting Tough on Wall Street

President Obama is now, finally, getting tough on Wall Street. Today he’s giving his support to two measures critically important for making sure the Street doesn’t relapse into another financial crisis

1. Separating the functions of investment banking from commercial banking (basically, resurrecting the Depression-era Glass-Steagall Act) so investment banks can’t gamble with insured commerial deposits in order to scope of their risk-taking activities.
2. Giving regulatory authorities power to limit the size of big banks so they don’t become “too big to fail,” as antitrust laws do with every other capitalist entity.

The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading.

Only a handful of large banks would be the targets of the proposal, among them Citigroup, Bank of America, JPMorgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status.

Mr. Volcker has been trying for weeks to drum up support — on Wall Street and in Washington — for restrictions similar to those passed in the Glass-Steagall Act in 1933. That law separated commercial banking and investment banking, so that the investment arm could no longer use a depositor’s money to purchase stocks, sometimes drawing money from a savings account, for example, without the depositor’s knowledge.

The 1929 stock market crash and subsequent Depression made a shambles of that practice. But Glass-Steagall was watered down over the years and revoked in 1999.