Risky Investments Became Sober, And Banks Became Drunk, Why We Have A Crisis.
Investment bankers have always looked down on regular bankers. Investment bankers made way more money. The regular bankers were upset about this.
Investment bankers raised funding for enterprise. Bonds, preferred stocks, new issues. Whatever. They could sell the new funding and make huge commissions. Regular bankers couldn’t do this. They were forced, by regulation, to make a little money steadily and not take any risk.
So, the investment bankers coveted the regular banking deposit base because here was a fresh, huge, source of money to put into investments, risky or not. Commercial bankers coveted investment bankers’ ability to make lots of money convincing savers that they could make more money than CDs if only they would invest.
Regulation kept the two industries apart. Until 1999 when the rules were changed. After that, the Depression era Glass Steagall act was dissolved and investment bankers were allowed access to depositor funds, and commercial bankers were allowed access to new, riskier, investment products. Both camps gained income as a result. Nobody thought about why the distinction was in place to begin with. And even if they did, the money to be made swept away caution.
The result was inevitable. Risky investments appeared to be sober, and banks became drunk.
We need to re-establish the distinction between investment banking and commercial banking. The two enterprises are wildly different. Even today, with all the monetary, and potentially huge fiscal spending on the horizon, we still haven’t corrected the 1999 legislaion separating the two. Commingling the two is why we have the current crisis.
Tags: Commercial Banking, Glass Steagall, Investment banking, Risk
December 1st, 2008 at 7:43 am
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December 2nd, 2008 at 12:42 am
Yes, you are right. Many of those investment bankers even knew or have been informed that what they were doing would have finished as a disaster. They did nothing. (Syron knew about it since 2004 when his risk management warned him that the bank (FRE) was buying too risky assets). It is impressive how quickly all this turned into such deep crisis.
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