To Save Commercial Banking From Gamblers, Re-enact Glass-Steagall Act - Mark II
Updated: February 2010
Bloomberg reported Barclays Plc President, Robert Diamond, on September 15, 2009 as 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, isbreathtakingly irresponsible, arrogant, insensitive, 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 control of people’s
saving. Together, gambling instincts and a blinding ambition to get rich quickly through claiming millions of dollars annually in bonuses engendered an era of recklessness and go-go banking,
contaminating the once cautious commercial banking culture and bringing the entire banking systems in the United States, United Kingdom, and many other countries close to collapse, had it not been for the hundreds of billions of dollars in taxpayers' rescue money.
Society’s saving should be protected from gamblers, rascals, and splendid financiers.
Glass-Steagall Act should be reinstated. It is significant that five former US Treasury Secretaries,Republicans and
Democrats, said in a letter to The Wall Street Journal in February 2010
that banks benefiting from public support by means of access to the
Federal Reserve and FDIC insurance should not engage in speculative
trading activities unrelated to essential bank services.
Politicians,
bankers, and lobbyists who argue against the reinstatement of
Glass-Steagall because no major bank had collapsed in 2008--only
investment companies, like Bear Stearn and Lehman Brothers, ignore
important facts. First, the major banks would have collapsed had it not been for decisive government rescue. US Secretary of the Treasury, Timothy Geithner revealed
in December 2009 that “the entire U.S. financial
system and all the major firms in the country, and even small banks
across the country, were at that moment at the middle of a classic run,
a classic bank run". Geithner said further that "without
the government’s extraordinary rescue
measures, the entire financial system was on the verge of collapse",
and that "none of them would have survived” had the government stood
aside and
let the crisis run its course.
Secondly, the collapse of investment companies usually happens because
such companies do not have a lender of last resort nor do they have a
customer deposit base to rely upon when their loans mature at times of
tight liquidity and no lender would roll-over those maturing loans or
extend new credit. On the other hand, yesterday's
investment companies that had merged with banking institutions and
became investment departments within those banks were protected by
trillions of dollars in customers deposits plus central bank's
protection as lender of last resort, notwithstanding
the damage that these investment pockets had inflicted on the financial
integrity and the net worth of their parent banks, which forced the government to come to the rescue in 2008.
I
would like to recount a personal experience I had some three decades ago, which
showed me a most vivid example of how sacred protecting other people’s money
can be. This experience was at the hand of a self-taught man, Saleh Abdulaziz
Al-Rajhi in Riyadh. Over lunch, at the home of his brother Sulaiman, an
assistant of Sheikh Saleh proposed to him a profitable transaction that seemed
innocuous enough in its risk profile. Sheikh Saleh, with his calm dignified
manner responded: “But this is our depositors’ money. We cannot do anything
risky with it”. Wow! Just compare this attitude with the kind of loud calls to
risk-taking by some of those who have the audacity in this Post-Glass-Steagall
age to call themselves “bankers” and who demand
that anyone unwilling to take risks should “get out of banking”.
