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Home      Articles by Elie Elhadj      --------- Credit 101 for Bankers- Mark II
 
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.
 
Glass-Steagall Act should be reinstated. Society’s saving should be kept away from gamblers.


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