The following is from a speech by Jerome Powell, a governor of the Federal Reserve, given at the Institute of International Bankers 2013 Washington Conference in Washington, D.C., on March 4, 2013, entitled, "Ending 'Too Big to Fail'":
Some have urged the resurrection of the 1930s-era Glass-Steagall prohibitions--that is, preventing the affiliation of commercial banks with investment banks. This proposal seems neither directly related to the causes of the financial crisis, nor likely to help end too big to fail. The systemic run that led to the financial crisis began with traditional investment banks, such as Bear Stearns and Lehman Brothers. The activities of these firms were, of course, not affected by the repeal of Glass-Steagall. Commercial banking firms now engage in activities traditionally associated with investment banking, such as securities underwriting. The combination of these activities under a single corporate umbrella did not contribute meaningfully to the financial crisis. In my view, losses at the commercial banks were more importantly a consequence of bad credit underwriting and the failure of risk management systems to keep up with innovation and the explosive growth in securitization--developments that were not fundamentally driven by the repeal of Glass-Steagall.
While I understand Governor Powell's points, I want to say a few things as to why repealing Glass-Steagall was a bad idea and why it should be restored. I'll be brief.
First of all, repealing Glass-Steagall was part of an overall mistaken cultural shift away from regulation, which shift led directly to the crash.
Second, while Glass-Steagall, per se, might not have prevented the crash (though I believe that not shifting the culture would have prevented it), retaining Glass-Steagall certainly would not have caused any harm whatsoever and would, in my estimation, have prevented under any circumstances, a significant portion of the crash by virtue of the fact that the commercial banks did create, acquire, fund, etc., departments that did engage in the bad practices that did cause the crash. The fact that those commercial banks were engaged in that activity made it more "acceptable" or "necessary" to bailout commercial banks and others. The contagion, as it were, was more easily spread by virtue of the absence of Glass-Steagall.
Third, the reason Glass-Steagall was enacted has not been as covered by Dodd-Frank. Dodd-Frank relies upon wishful thinking (internal compliance and monitoring/reporting) where Glass-Steagall simply cut the chord and the speculative mind-set.