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Credit 101 for Bankers - Mark II
To Save Commercial Banking From Gamblers, Re-enact Glass-Steagall Act

Barclays Bank President, Robert Diamond, on September 15, 2009, told 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 breathtakingly irresponsible, ignorant, and insensitive to the millions who lost their livelihood and life saving. 


Diamond's words are not surprising. He belongs to the toxic risk-taking culture that pervades dealing rooms, the casino gambling mentality of the investment industry. Indeed, Mr. Diamond built a grand speculative trading machine at Barclays. That Barclays was fined £290 million in June 2012 for rigging Libor is not surprising. 


Mr. Diamond sould have echoed, 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 regulations, controls, and aversion for excessive risk-taking in order to safeguard society’s saving. 


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. Satisfying a dangerous gambling instinct and a blinding ambition to get rich quickly engendered an era of recklessness and go-go banking. The repeal of Glass-Steagall Act contaminated the once cautious commercial banking culture and brought 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.


Glass-Steagall Act should be reinstated. Society’s saving should be protected from gamblers, "rascals", and "splendid financiers". 


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 Act because no major bank had collapsed in 2008--only investment companies, like Bear Stearns and Lehman Brothers, are disingenuous. Their argument ignores 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 c>Credit 101 for Bankers (Mark II)


lassic 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 generally 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 when no lender would roll-over those maturing loans or extend new credit. 


Further, 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 here a personal experience I had some three decades ago. This experience shows how sacred protecting other people’s money must be. It was at the hand of a self-made man in Riyadh, Saleh Abdulaziz Al-Rajhi. During lunch, an assistant proposed a profitable transaction. Sheikh Saleh, with his calm dignified manner responded: “But this could expose our depositors’ money to undue risks. We cannot do anything risky with people's trust in us.” 


For more on Mr. Diamond's brand of banking, read: "Systematic Dishonesty" at Barclays published by BBC on June 26, 2012. For a timeline on some of the key dates see: Barclays' widening Libor-fixing scandal, outlined by BBC on July 3, 2012.

On July 3, 2012, Mr. Diamond resigned from Barclays Bank.


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