WASHINGTON — Though administration officials are on record as opposing the resuscitation of the Glass-Steagall Act, President Obama's proposal last week to curb growth and limit risk taking reinforces core concepts of the Depression-era legislation.

The White House proposal does not go as far as the 1933 law that separated commercial and investment banking — it would still allow banks to underwrite securities, among other things — but observers said it is strongly headed in that direction.

"It sounds to me like they are trying to accomplish the same thing that Glass-Steagall was originally enacted to accomplish," said Robert Clarke, a former comptroller of the currency who is now a senior partner at Bracewell & Giuliani LLP. "It's a minimalist version of Glass-Steagall."

Glass-Steagall was largely dismantled in 1999 by the Gramm-Leach-Bliley Act, fueling consolidation in the banking, securities and insurance sectors and legitimizing the merger of Citicorp and Travelers Inc. to create Citigroup Inc. The Obama administration is effectively turning back the clock with its proposal to bar depository institutions from proprietary trading or funding private-equity firms or hedge funds.

"Try and think about what Citibank looked like before the Fed allowed Citi Securities to exist," said Douglas Landy, a partner at Allen & Overy LLP. "You may end up somewhere back there."

But the proposal has put the administration in a bind. Top officials, including Treasury Secretary Tim Geithner, have forcefully argued against reviving Glass-Steagall.

"I would not support reinstating Glass-Steagall and I don't actually believe that the end of Glass-Steagall played a significant role in the cause of the crisis," Geithner told the Joint Economic Committee in November.

After unveiling their proposal, administration officials continued to stick to that line but acknowledged that the plan includes many of the intellectual elements tied to Glass-Steagall.

"The spirit of this, which is separating risky activities from banks, which is trying to eliminate some conflicts of interest, and which is about trying to limit the amount of subsidy or backing from the American taxpayer that's getting translated into their bottom-line profits, those are themes that people were trying to address back in the Depression when they passed Glass-Steagall," Austan Goolsbee, the chief economist of the President's Economic Recovery Advisory Board, told reporters last week.

Glass-Steagall largely banned proprietary trading with certain exemptions for safety and soundness concerns. The trading, in which a bank buys and sells stocks and other securities from its own account, led to big profits at institutions after Gramm-Leach-Blilely allowed the transactions.

After banks that received bailout money began turning big profits from proprietary trading, the administration began to target the activity more closely and now says the transactions should only happen when they benefit clients.

"You saw coming out of the rescue the government provided a safety net to financial institutions that they used and they have in recent months started making considerable profits off their proprietary trading for themselves, not for their clients," Goolsbee said. "That is certainly a factor in convincing a lot of people that we've got to make sure that issues like that are not going to be pervasive going forward."

Such moves strike at the heart of what Glass-Steagall tried to accomplish. "It aims at separating commercial banking and investment banking," said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. "Some of the crisis firms like Bear Stearns and Lehman Brothers were very invested in proprietary trading and relied on hedge funds. They owned banks."

But implementation of Obama's plan for proprietary trading could be messy since banks often conduct trading on behalf of clients from their own account. Observers are expecting more details on the plan soon, but said it could leave large loopholes that banks could exploit.

"They have to articulate better the type of risk and conflict they're trying to get rid of," Landy said. "But I think it will be very difficult. The thing about artificial barriers is that people spend all their time trying to get around them."

The difficulty of sorting out client-oriented proprietary trading from other types of trades could spike the proposal before it even gains traction in Congress, some said. "It further complicates this proposal in Congress," said Brian Gardner, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc. "This is going to run into roadblocks as they put pen to paper and is why I remain skeptical it will become law with any kind of teeth to it."

Still, the administration's plan does not amount to a full reinstatement of Glass-Steagall. Importantly, banks would still be able to underwrite securities and other instruments. "What Glass-Steagall says is banks cannot be affiliated with companies principally engaged in underwriting and dealing in corporate debt and equities," said Ernest Patrikis, a lawyer at White & Case LLP.

"That's not what Volcker seems to be saying," Patrikis said, referring to former Fed Chairman Paul Volcker, the main proponent of the administration's plan. "Volcker seems to be saying he has no problem with underwriting. Underwriting for securities tends to be a riskless business. … What he does not like is proprietary trading."

The Senate Banking Committee is due to hear more details from Volcker at a Feb. 2 hearing.

Some lawmakers are pushing to go further. Sens. John McCain, R-Ariz., and Maria Cantwell, D-Wash., introduced a bill last month that would restore most of Glass-Steagall by reviving the walls between banking, securities and insurance.

But observers do not expect a full revival of Glass-Steagall.

"The administration recognizes that this is a very different world and the bankers would go wild if they said they want to resurrect Glass-Steagall so what they are trying to do is to take a more nuanced approach," said Brad Sabel, a co-leader of Shearman & Sterling LLP's economic stabilization advisory group.

Others said policymakers would be wise to consider how the repeal of Glass-Steagall helped during the financial crisis.

"If it wasn't for Gramm-Leach-Bliley eliminating Glass-Steagall, we would have been in real trouble to the extent that those policies encouraged Goldman Sachs and Morgan Stanley to become holding companies and allow for the acquisitions of Bear and Merrill Lynch," said Gil Schwartz, a partner at Schwartz & Ballen LLP. "If it weren't for Gramm-Leach-Bliley eliminating Glass-Steagall, none of these major events would have occurred … and if they hadn't occurred, there would have been a complete meltdown of the system."

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