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Alternative Market Briefing

Other Voices: Obama Bank’s plan revives Glass Steagall Act, may improve capital raising environment for hedge funds

Monday, January 25, 2010

This article was written by Bryan Goh, First Avenue Partners LLP, London :

It sounds like a plan. President Obama in an effort to address what is widely believed to be a flawed banking model has decided to ressurrect the Glass Steagall Act 1933.

Glass Steagall 1932 had already been effectively revived, extended and implemented in 2008 as the Fed rode to the rescue of a banking system on the verge of collapse. It is perhaps ironic that a year prior to the crisis of 2008 Hank Paulson was in China extolling the benefits of a market economy. A year later banks are being de facto nationalized in the Western world. It is worth pointing out that Chinese banking regulation maintains a Glass Steagall type separation between commercial and investment banks even today.

Obama's plan stops short of calling for a reinstatement of Glass Steagall. Instead "banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers,” The plan has the fingerprints of ex Fed Chairman Volcker, it is being informally referred to as the Volcker Rule. Larry Summers on the other hand has pointed out that the victims and perpetrators of the crisis had been investment banks and insurance companies which would not have been impacted by Glass Steagall in the first place.

Great plans are often precipitated by great crises (Glass Steagall itself was enacted in the wa......................

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