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Banking needs regulation

Members of the House and Senate banking committees quietly are working with industry lobbyists on legislation that would change how the savings and investments of all Americans are handled.

In the new anti-regulatory spirit, the committees are looking to repeal or amend the Glass-Steagall Act, passed in 1934 to keep separate the banking and securities businesses _ and thus prevent a recurrence of the misbehavior on Wall Street that preceded the 1929 crash. The results could be catastrophic. The profit motive is a major engine driving Wall Street.

But my experience in the Manhattan District Attorney's office suggests that regulating that engine is necessary for the health of our economy _ even when regulation cuts into profits. Changing Glass-Steagall would create huge financial institutions impervious to sound regulation. This would put us all at risk.

Glass-Steagall established two distinct regulatory approaches. Banks were regulated more or less in secret. Discretion was necessary because public criticism could cause a run on banks _ something nobody wanted after the experience of 1929.

Nevertheless, bank regulation was generally meticulous and severe, meaning that bankers were supposed to be prudent, cautious fiduciaries of their depositors' money.

If depositors put their money into a federally insured bank, they were assured that the United States would see that they got their deposits back.

The securities business was regulated not so much for safety and soundness but to ensure "full disclosure" and a level playing field.

The Securities and Exchange Commission was less interested in regulating individual companies, including speculative ventures, than in making sure that potential investors had the information they needed to make informed decisions and that all investors had access to the same information. Offenders were publicly chastised and punished.

This dual regulatory program has worked well, protecting the public from abuses all too common overseas _ much as they were common here before the crash.

One reason that Congress wants to change a fundamentally sound system is that the financial landscape has changed dramatically since 1934, when pension funds, mutual funds and money market accounts were relatively unimportant.

Under the grass is greener theory, banks now want some of the underwriting action reserved for investment companies, while the securities business wants to expand its scope. Some regulators are willing to go along if they, too, can enlarge their bureaucratic turf.

This is in sharp contrast to the thinking behind Glass-Steagall, which was to keep financial institutions small enough so that if one failed, the others would not fail with it.

But here is the key regulatory point. Huge, multifaceted enterprises involved in banking, securities and insurance would be effectively immune to supervision by any regulators.

What we do not have is an agency capable of overseeing the monster companies that would follow the repeal of Glass-Steagall. We do not have the capacity, either in the SEC or the bank regulatory agencies, to monitor fully a multistate, international full-service financial institution.

Nor is it at all likely that Congress would be willing to finance a new agency that would oversee all financial services corporations and establish new regulatory traditions.

If we tried to establish such an agency in today's anti-regulatory climate, our likely reward would be a repetition of the savings-and-loan debacle, but on a much larger scale.

What is at stake here? It is not the personal interest of the bankers, securities dealers and regulators who want more turf.

They are far less important than the public interest in how our money is handled.

John W. Moscow worked for 20 years in the Manhattan district attorney's office prosecuting financial fraud.