How Did the Banks Get So Weak, Anyway?

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Senator Carter Glass (D—Va.) and Congressman Henry B. Steagall (D—Ala.). Image via Wikipedia.
Senator Carter Glass (D—Va.) and Congressman Henry B. Steagall (D—Ala.). Image via Wikipedia.

A great article from Forbes appeared in my Google alerts last week and I had to share.

The article begins as yet another article describing the sad state of affairs at big US banks, namely Bank of America and Citi. The article goes on, however, to give a refreshingly short and simple explanation of how the banks got to the terrible position we find them in today:

Should either Bank of America or Citigroup fail, there will no doubt be much finger pointing. But, rather than ask who caused it, we should be asking what caused it. In 2001, the great complaint from US banks was that the European and Asia banks had competitive advantages over US banks in that they could engage in retail banking, commercial banking, investment banking, brokerage, insurance, hedge funds, private equity, and the like. Whereas, the Glass-Steagall Act unfairly limited them to retail and commercial banking.

Mama always said to be careful of what you ask for because you just might get it. The lack of a Glass-Steagall Act in Europe has led European banks to wobble under the weight of their underwriting of European government debt and other investment banking challenges. US banks got just what they asked for.

And, as we all know all to well, less regulation for the banks has meant a much less stable industry that almost took down the entire global economy. In this recession-weary country, we are all still feeling the consequences of big bank wobbles, stumbles and crashes.

What this article doesn’t address, though, is how the banks can take on a MUCH more responsible role in the world economy. Hopefully questions like the one that RAN asked BoA’s CEO Brian Moynihan on Monday can help lead the banks toward more responsible investing that will be better for the economy, and the planet.