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Sunday, 1 November 2009

People who bank with Glass-Steagall houses, don't throw stones

An article in this weekend's Telegraph from Liam Halligan, talks about the need for a separation of investment banking from commercial banking, and adds the name of George Soros to those who want "internal compartments that separate proprietary trading from commercial banking", although in Mr Soros' case, this could well be because proprietary traders such as himself don't necessarily want competitors funded by low cost deposits.

Mr Halligan goes further than the writers on the FT, lambasting what he sees as a conspiracy between politicians and the banks and their lobbyists. He cites Robert Rubin who moved from Goldman Sachs to the Clinton administration and then back out to a post-Glass-Steagall Citigroup where he was paid tens of millions of dollars for his services. He may or may not be right on that point but he demolishes some of the arguments against Glass-Steagall:

The universal banks now argue it's impossible to draw a line between investment and commercial banking. As King says: "It's hard to see why". The reality is that existing regulations already distinguish between different bank functions when determining capital requirements.


"Lehman was a pure investment bank," they say, "and that failed". Yes, but had the entire banking system not been riddled with bad bets and leverage, Lehman's collapse would never have posed even the slightest "systemic danger".

But most importantly, he states the blindingly obvious fact that is ignored by politicians, that proprietary trading and similar risk taking activities can only create systemic danger when commercial banking activities are systemically linked with them, either by lending to them or buy sharing in the same pool of risk capital. Break that link and we do not have to worry about banks that are to big to fail, and that is what was realised in the US in the 1930's.

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