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On January 6th I wrote an article calling for the return of the kind of functional separation between commercial banking and investment banking that used to exist under the Glass-Steagall Act. On Thursday, President Obama proposed something very similar. I can only say how pleased I am to see that President Obama and Paul Volcker count among the lonely readers of my occasional blogs.

Friday, of course, all hell broke loose with those with axes to grind wailing about their gored oxen and claiming that the adoption of the Volcker Rule will cause life as we know it to cease to exist. Well, the reality is much more prosaic with the observations of the Wall Street Journal reflecting it more accurately than the more common hysterical comments of those like the British ‘alternative asset service’ Preqin.

In fact, the effects of the full adoption of the Rule would be nil on the 95% of the U.S. banks that do no investment banking, but more pronounced on firms like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), who frantically obtained banking licenses as their houses of cards were collapsing in order to have access to the lender of last resort facility of the Fed. The effects on institutions like JP Morgan (NYSE:JPM) that do a lot of both would fall somewhere in the middle.

Common sense

The Volcker Rule is nothing more than a fairly simple disentanglement of bank deposits from risky activities. It is notable in its common sense. Who could argue for having bank deposits, on which little or no interest is paid, fund risky investments whose returns are enjoyed only by the shareholders of financial institutions and by the staff who have captured the apparatus of these institutions for their own benefits? The depositors get nothing for it, know nothing about it, have no say in it, and bear all the risk either as a result of losing their savings if things go wrong, or, if these savings are guaranteed by the government, by being taxed to replenish the guarantee fund. (Yes, I know, the bank pays part of the tax, but its cost is largely passed onto the depositor in the form of a lower rate of interest.)

Well, it will be a long time before the Volcker Rule is put into our legislation, as we will be hearing from more oxen owners for a long time. However, a major step in the right direction has been taken. Let’s hope that the Rule, when passed, is not too diluted.

Disclosure: The author is long JPM

Source: Should Glass-Steagall Return? I Prefer the Volcker Rule