Is Glass-Steagall Coming Back?

Majority Leader Steny Hoyer said the House is considering reinstating the Glass-Steagall Act of 1933, which was initially used to control the after-effects of the Great Depression and barred bank holding companies from owning other financial companies. The Maryland Democrat told reporters, a renewal of the law "is certainly under discussion," according to a story from Bloomberg.

Glass-Stegall was repealed in 1999, which allowed the combination of Citigroup Inc. (NYSE: C) and Travelers Group, Inc. (NYSE: TRV) in a $46 billion merger.

Hoyer made the response when asked whether or not the Obama administration would do more to encourage big banks to lend more in order to spur economic growth.

Changes in the law allowed institutions such as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) to transform into bank holding companies from securities firms, allowing them to get cheap funding from the Fed during the recent financial crisis. Additionally, if Glass-Steagall hadn't been repealed Bank of America (NYSE: BAC) wouldn't have been able to acquire Merrill Lynch.

Fed Chair Ben Bernanke said that separation of market making activities and commercial loaning would not necessarily make things stable.

Hoyer commented that Obama's meeting with the bankers was a good thing to do, but "he's got to go further than that." Hoyer also noted that the administration is also considering direct lending from the TARP.

In a now unbiased interview, former Citigourp head John Reed said that we should learn from our mistakes and "when you're running a company, you do what you think is right for the shareholders." He says that now that he is looking at things as a citizen, he is for the reimplementation of the Glass-Steagall Act.

Essentially, the reinstatement of Glass-Steagall could break-up many of the recent major mergers in the financial industry and amend how the TARP funds will be used. So, is this the right move at the right time? Or the fourth ring in an ever-expanding three ring circus?

Investors are bearish on the news, shares to watch include:

• Bank of America (NYSE: BAC) - down 2.91% to $15.18;
  
• Goldman Sachs (NYSE: GS) - down 1.66% to $163.35;
  
• Morgan Stanley (NYSE: MS) - down 1.06% to $29.85;
  
• Citigroup (NYSE: C) - down 4.46% to $3.54; and
  
• J.P. Morgan Chase (NYSE: JPM) - down 2% to $40.92.

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