Report From the White House: Would Glass-Steagall Have Saved Us?

It's no surprise that investors in Fooldom are outraged about the
risky practices and untenable leverage taken on by "too big to fail"
financial institutions. That these companies were, in fact, doing
business within the letter of the law is fuel for the White House's
ambitious plan to overhaul financial regulation.

Many of you who
made posts to our article calling for questions about the White House's
financial regulation reform plan harkened back to the good old days,
when Glass-Steagall was the law of the banking land.

• Whatsafool
  wrote: "I have two words to deliver to the Administration: Glass
  Steagall. This law, dismantled by [former Sen. Phil] Gramm and his ilk,
  protected Americans from economic collapse very nicely, thank you, for
  50 or so years."
• Markgiese proposed warning labels such as the
  ones you see on cigarette boxes, to make sure investors know exactly
  how financial products and services affect the consumer's financial
  health: "Examples: Brokers don't make money because they help you
  increase your income, they make money on each completed transaction.
  Financial advisors don't make money when you successfully retire with a
  comfortable income. The growth of your nest egg provides a very small
  incremental improvement in the advisor's overall income. The initial
  sale is all they are paid to care about. ... Ratings agencies that are
  paid by the organizations they are rating cannot generate unbiased appraisals."
• Lastly,
  1ChefJeff painted a picture of how he thinks the rules of separation
  should work: "Reinstate the separation of banking from securities
  underwriting a la Glass Steagall but without the [loopholes] that
  existed in Glass Steagall. Banks need to provide credit to individuals
  and business. ... Insurance companies need to sell insurance. ...
  Brokers need to advise clients on stocks & bonds. ... Car
  [manufacturers] need to build cars, not loans. ... Retail chains need
  to sell product, not be banks ... and all of them need to be small
  enough to go out of business when they fail to provide what their
  consumer wants without a major shake-up to the financial marketplace."

Great
comments, Fools. And so, on your behalf, David Gardner and I asked
Austan Goolsbee, chief economist for the President's Economic Recovery
Advisory Board, if new laws -- a la Glass-Steagall -- are in the cards.

Scroll
down just a few inches to watch the video. Or read on for a briefing on
the history of banking regulation and how the rules of the road have
been changed over time.

Your Glass-Steagall refresher
Glass-Steagall was enacted in 1933, after that other
big crash, to protect depositors and taxpayers from exposure to risky
banking business practices. The gist of the law was that a company
could be either a bank or a brokerage, but it could not be both.

For
a while, Glass-Steagall -- along with the 1956 Bank Holding Company Act
-- prevented financial institutions from mixing a combustible cocktail
of banking and non-banking business, such as dealing in commercial
paper and mortgage-backed securities. Then in the 1960s,
banking-industry lobbyists began chirping in politicians' ears and got
them to chip away at some of the restrictions. By the 1990s,
Glass-Steagall was viewed as a relic of overly cautious regulation, and
it was eventually repealed.

Flash forward to last year.

On
these pages, we've previously debated whether we'd be in this financial
mess even if Glass-Steagall were still in place. Read "Who's More to Blame: Wall Street or the Repealers of the Glass-Steagall Act?" for a bull-bear standoff.

Keep those questions and comments coming
As
individual investors, we all have a material interest in how President
Obama's new rules of the road will affect our portfolios, the financial
products and services we use, and the companies in which we invest.

We
are committed to keeping our conversation with the administration going
and representing you, our community of Fools: Enter your comments below
about financial-regulation reform and what changes you, as an
individual investor, want the administration to make.

Tomorrow on
Fool.com, we talk with Goolsbee about "too big to fail," banks that
have become even bigger post-crisis, and how the administration views
the present state of the banking industry.

© 2009 UCLICK L.L.C.