Break up the Banks!

By: James Walsh- Business Instructor- Online Division

Sanford “Sandy” Weil, dealmaker and builder of the megabank Citicorp recently shocked an audience on a cable TV Network by calling for a split up of the big banks.
Mr. Weil reignited a debate that still simmers beneath the surface, the issue of just what kind of banking system best serves the interests of the U.S. economy.

You see, banks engage in two types of activity. One is the main street banking we all know. We deposit our paychecks there; have checking accounts and credit cards with them. And most importantly they make loans to us for things like buying houses and cars, crucial activities for a functioning economy.  But Banks also engage in other Investment activities like securities trading. That can involve high risk instruments like derivatives and CDO’s  They can be spectacularly profitable activities when they make the right call, and run up spectacular losses when they are wrong. In ’08 when they were spectacularly wrong, taxpayers had to bail them out or see the entire bank go under.

There is a way to do this better say Mr.Weil and others, by splitting up the banks two major activities. The main street bank would do main street things and be regulated by the Federal Reserve. Depositors would enjoy protections under the FDIC. The Investment part of the bank would be broken off, and allowed to sink or swim on its own and no taxpayer bailout if they make bad calls!

Now all we need is our gridlocked political system to apply the fix. Throw in a large dose of dollars from the powerful banking lobby and real reform has never gotten off the ground in Washington. But at least people like Sandy Weil will not let us forget the large risk we take by our inaction.