Sure to dominate the media cycle today is the Obama administration's surprise announcement of what some observers are already calling Glass-Steagall II, after the late, oft-lamented law that separated investment and commercial banking activity, whose repeal under President Clinton has been blamed in part for the financial crisis. The New York Times reports, and the Wall Street Journal details, that Paul Volcker, an Obama adviser who was reported as being marginalized in the White House just a week ago, is behind this sudden and unexpected announcement.

"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 (C), Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo. Goldman Sachs (GS), the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status," the paper said. "On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation's payment system.

On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout."

That's not to mention, of course, that investment banks, with Goldman being the prime example, used prop trading to bet against some of the very securities products they were selling to customers. Despite the focus on Volcker's proposal, the paper makes the curious note that Timothy Geithner will appear with the president during the announcement." (Reuters)

About time someone noticed this glaring hole and took action.


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