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To Save Commercial Banking From Gamblers, Re-enact Glass-Steagall Act - Mark II
September 2009
Bloomberg reported Barclays Plc President, Robert Diamond, telling the
British Broadcasting Corporation’s Radio 4: “There isn’t any banking without risk” and that
anyone who can’t take chances should leave the industry. “We need banks that
are confident and banks that are willing to take risks,” to “get the economy
going again.” Anyone unwilling to take risks should “get out of banking,” he
added.
These words are disconcerting. Mr.
Diamond's advocacy of risk-taking while the world is still suffering from the
nasty effects of the worst financial meltdown since the Great Depression,
caused primarily by the recklessness of risk-takers, is irresponsible, arrogant, and
disrespectful to the millions of people who lost their livelihood and to the investors
who lost their life's saving in the East and the West. Mr. Diamond's words, however,
are not surprising. He echoes the risk-taking culture of the investment
industry, to which he belongs, instead of the culture of bankers. A banker
would echo, instead, the words of U.S. Comptroller of the Currency and later Secretary of the Treasury, Mr. Hugh
McCulloch, who wrote in December 1863 to all national banks what has become
like a banker’s bible:
“Let no loans be made that are not
secured beyond a reasonable contingency. Do nothing to encourage speculation.
Give facilities only to legitimate and prudent transactions.
“Distribute
your loans rather than concentrate them in a few hands. Large borrowers are apt
to control the bank.
“If
you have reasons to distrust the integrity of a customer, close his account.
Never deal with a rascal under the impression that you can prevent him from
cheating you.
“Pay
your officers such salaries as will enable them to live comfortably and
respectably without stealing, and require of them their entire services. If an
officer lives beyond his income, dismiss him.
“The
capital of a bank should be reality, not a fiction.
“Pursue
a straightforward, upright, legitimate banking business. ‘Splendid financing’
is not legitimate banking, and ‘splendid financiers’ in banking are generally
either humbugs or rascals.”
Investment
companies are not banks. Investment companies are prohibited from taking customers'
deposits and from using the word “bank” in their name. Banks are the only institutions mandated to take customers' deposits. While it is true
that “there isn’t any banking without risk,” banks have
evolved a culture of regulation,
controls, caution, and aversion for excessive risk-taking in order to
safeguard society’s saving.
For
some sixty years banks were kept separate from investment firms. The repeal in
1999 of the Glass-Steagall Act of 1933 in the US removed the wall that
separated banks from non-bank financial companies. Post Glass-Steagall, banks were cobbled
together with investment, insurance, and brokerage companies. Non-bankers,
“rascals” and “splendid financiers” took charge of the billions in people’s
saving. In pursuit of huge performance bonuses, an era of go-go banking
contaminated the once cautious banking culture and contributed to the current
economic debacle.
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