A Glass Act
Sunday, September 21, 2008. 

In a story in today's Charlotte Observer, Rick Rothaker wrote of the day the news broke that the venerable Merrill Lynch would be acquired by Charlotte's Bank of America: "[a]t a restaurant at the base of the Merrill tower, the takeover news was rippling through lunchtime conversations. General manager Melonee Gilchrist said the firm's investment bankers were taking the news as expected. 'They're drinking,' she said."  I can't help but wonder if that's why they're in this mess in the first place.

As lawmakers responded to the onset of the Great Depression, the U.S. Congress passed the Glass-Steagall Act of 1933. Glass-Steagall created a firewall between commercial banks (gathering deposits and making loans) and investment banks (underwriting and selling securities).  Commercial banks were prohibited from underwriting and selling securities and investment banks were prohibited from taking deposits. So, Glass-Steagall was enacted to protect the stability of Main Street from the routine and exceptional volatility of Wall Street, which volatility is illustrated by the recent implosion of the major U.S. investment banks.

Then, in 1999, the Gramm-Leach-Bliley Act repealed the strictures of Glass-Steagall and restored the pre-Depression order. Commercial banks can be involved in investment banking and investment banks can be involved in commercial banking. The line between commercial and investment banks are blurry again. Nevertheless, the largest commercial and investment banks didn't start a merger frenzy - commercial banks were still largely lenders and investment banks were still focused on Wall Street.

But now, Goldman Sachs and Morgan Stanley have filed to convert from investment banks to bank holding companies (commercial banks); Lehman Brothers filed bankruptcy; and Merrill Lynch was acquired by Bank of America (which not long ago was a relatively small Charlotte bank called NCNB). It's hard to fathom that the largest bank in the United States will soon be headquartered in Charlotte. I guess that's why the Merrill bankers were drinking at lunch.

More important than whether Merrill bankers will have to start getting used to Carolina 'que-sine, I wonder how the economy would have handled the current crisis if the four big investment banks had been part of commercial banks all along.  Would the strength and discipline of the commercial bank have prevented the crisis.  Or will the recombination of commercial and investment banks "Leach" the stability out of our banking systems and the innovation out of our markets?
 

Greed and fear, which routinely govern financial markets, have seeded this global crisis.

- Robert Samuelson, "Wall Street's Unraveling," The Washington Post, September 17, 2008

Copyright  ©  2005 Ashe Lockhart. All rights reserved.