First, what is the difference between investment and commercial banking?
Second, why should they be separate or not be separate?
Why was the Glass-Steagal act of 1934 regulating banks repealed?
Third, without financial regulation will the banks take advantage of the public to an excessive degree and possibly cause an economic crash collapse?
And finally, why is there no incentive to heavily regulate Wall Street?
My understanding is that investment banking is riskier, so if the investment banks gamble in ways that could affect the commercial banks, a banking collapse could have society wide or global consequences whereas if they are separate, the damage is limited to a few investment firms.
Indeed, yes. Investing is inherently riskier than making small business and auto loans and such. And mixing the two allows investment banks to take risks with depositors money whereas if the two are separate the bank can only risk its own money. By keeping the two separate, you expose depositors to a lower risk of the bank failing.
Could you clarify whether you’re aware of the current regulations on banks and investment firms and what would constitute “heavy” regulation?
Because the US government had to bail out the banking system in the fallout from Lehman Brothers going bankrupt. More accurately, stopping the domino effect of Bear Sterns going down when it was patently obvious that Bear was a front for JP Morgan, and then JP Morgan would have gone down along with the other big boys. I worked at Lehman’s Hong Kong for a year in 1996, and they had ZERO interest or real systems in place for risk management. It was all about making big bets because it was other peoples money.
It was one thing when investment banks were still private partnerships, because it was partner money on the line. Once they all went public, it was game over because Uncle Sugar was the too big to fail backstop and still is.
Glass-Steagal was put in place in the aftermath of the Great Depression. It’s repeal ultimately at the very least magnified the Great Recession. The repeal was one of the dumbest regulatory moves ever. And it was repealed because lobbyists spent a ton of money on both sides of the aisle. I can’t find a really good article that laid out the dominos and players including Bill Clinton signing the Gramm Leach act (which “repealed” parts of the Glass Steagal Act)
Does anybody remember the scene in the Wolf of Wall Street when the FBI agent is riding the subway, looks down at the newspaper to see that Jordan-Belfort from Stratton-Oakmint was sentenced to three years in jail and then look around him at the people on the subway car in deep reflection.
I think he realized that no matter how many sleazy white collar criminals he puts in jail, they will only get a light sentence and average Americans will still have to continue slaving away at their jobs.
Once these white collar criminals get out of jail they are free to take advantage of the public again.
Why does America admire Jordan Belfort and Donald Trump more than the FBI agent?
I had a lawyer tell me last month that the regulations he works under are nothing compared to what I had to work with. Compliance is one of the biggest departments in any investment firm. Everything I do has to be justified, every communication I make has to be recorded. All so if I go bad somehow - or if someone files a complaint - I can be investigated. At any point during the year a regulator has the right to walk into my office and essentially freeze it, demand my records and hold me in place until he’s satisfied.
And I’m really just one of the guys in the field dealing with small time investors. The ways in which the big firms are handled can be rougher. And they should be.
Want to make change in the industry? I’ll throw a few out there.
Make everyone a fiduciary. So they can be personally liable for mishandling their client’s money.
Make an exclusion zone. Should a bank require a bailout, no member of the board may serve on any other board for 10 years. No one in the C-suites is allowed to occupy a similar position ever.
Limit boards. Each person is allowed to serve on one for-profit and non-profit board at a time. Limit interlocking boards of directors.
Let large banks fail. Examine them carefully and expose the players to criminal and civil prosecution for misdeeds. Someone at Wells should be in the dock for that incentive scheme two years ago. Willful blindness is a real thing.
It really comes down to personalizing the risk that the big players take. Make the regulations expose them personally, not just corporately.