“A culture of dangerous greed and excessive risk-taking has taken root in the banking world” since the repeal of the Glass-Steagall Act in 1999, said Senator John McCain last week when he supported Senator Elizabeth Warren in pitching legislation they’d baptized the “21st Century Glass-Steagall Act.” Senator Warren told Wall Street, where failure has been rewarded with bailouts and record bonuses, that “Banking should be boring.”

Wall Street must have gotten the willies. But it was a quixotic moment for two senators from the opposite sides of the aisle to stand up to the banking lobby.

“Big Wall Street institutions should be free to engage in transactions with significant risk,” Senator McCain explained – such as “investment banking, insurance, swaps dealing, and hedge fund activities,” Senator Warren clarified – “but not with federally insured deposits.” While the legislation “would not end Too-Big-to-Fail,” he said, “it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.”

Senator McCain isn’t quite the immaculate soul in this discussion: in 2008, as presidential candidate, he – along with his opponent Barak Obama – strongly supported TARP and the whole principle that these megabanks must be bailed out at taxpayers’ expense. But TARP amounted to inconsequential peanuts compared to the many trillions the Fed was hand-delivering free of charge to the banks, and he never said squat about that either. But hey, a guy can change his mind.

The original Glass-Steagall Act became law in 1933, in response to the financial crisis that triggered the Great Depression. It separated depository banks from investment banks and worked like a charm. There were stock-market crashes, bond fiascos, and bank collapses, as there should be, but no financial mushroom clouds formed over the economy. Yet, starting in the 1980s, the Fed – ever the banks’ most intimate companion, rather than a regulator with teeth – and the Office of the Comptroller began to chip away at it by “reinterpreting” certain legal terms. Congress, after 12 attempts to repeal it, finally threw it out in 1999, with a big nod, victorious smile, and energetic signature by President Clinton.

It triggered a wave of consolidation among banks, hedge funds, insurance companies, brokers, private-equity firms, and other outfits. And it took these geniuses of bankers only nine years to build up their empires to the point where they started collapsing under the weight of their bets gone wrong. The Lehman moment billowed into a mushroom cloud that became the Financial Crisis that, after trillions of dollars from the Fed, ended with even greater consolidation.

Now twelve Too-Big-To-Fail and Too-Big-To-Jail banks – 0.2% of all banks – control 70% of all banking assets. Because of their status, they’re “treated differently from the other 99.8% of the banks and differently from other businesses,” the nearly rebellious Dallas Fed President Richard Fisher pointed out [but he isn’t singing from the Fed’s hymn sheet].

“Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” lamented Senator Warren. “The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk.”

The 21st Century Glass-Steagall Act (PDF) would reestablish a wall between these high-risk practices and commercial banking – which, as Senator Warren had put so elegantly, “should be boring.” It would make the financial system more stable and secure, she said. Gobs of people have been clamoring for this kind of financial and regulatory reform. It would be the biggest threat to bankers, their industry, their bonuses, their source of free money, their way of life, their egos, their religion even.

“The banking lobby is simply too strong to allow something like this to happen,” said Bob Rice, managing partner at Tangent Capital Partners, in a Bloomberg interview. He thus confirmed just how quixotic the senators’ stance has become. “We’re having trouble getting the basic Volker rule from Dodd-Frank implemented,” and Senator Warren’s plan, he said, would go much further than the Volker rule.

If enacted, the law would keep megabanks from holding the federal government hostage and from forcing a bailout whenever they need it, only to propagate afterwards with reinforced vigor their blind risk-taking and bonus-extraction culture and their key strategy of socializing losses and privatizing gains – as if nothing had happened.

The 21st Century Glass-Steagall Act was a valiant effort, but now, only a week after its introduction, the financial industry has already declared victory. It simply won’t be allowed to happen. And the risk-taking orgy, nurtured by the Fed’s addictive and intoxicating flood of QE dollars, zero-interest-rate policy, and bailout guarantees must go on. Alas, there are feeble signs that it might not…

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