Next in line will be a reform Bill, aimed at "casino banking" — more politely called investment banking, and loosely defined as the business of taking financial positions on a bank's own account. Major banks found this business most rewarding, until the bets suddenly went wrong and threatened to bring them down. Were they too big to fail — and if so, were they too big? Then they needed reform.
So they will be made to put insulation round investment banking and keep it separate from the rest of their business. If one of their swashbuckling dealers suddenly bets the house and loses untold sums, at least they will not have to shut the doors of their branches, impoverish their customers or throw themselves on the mercy of the hapless taxpayer — so long, that is, as the insulation holds. This Bill is going to take some drafting.
In practice, the reformers may find that their work is done for them. Investment banking in its hectic heyday looked set to make fortunes for everyone — dealers, partners and even shareholders — but, of course, their interests differed. The shareholders learned the hard way that they needed deep pockets. Sandy Weill, who assembled Citicorp of New York as a financial one-stop shop, now thinks that it would be better if taken apart. Barclays' new chairman, Sir David Walker, may start to think the same way.
Even so, banks will still find means of getting into trouble. The mistakes of a sanguine manager, as Walter Bagehot said, are far more to be dreaded than the thefts of a dishonest manager. Sanguine lenders at Northern Rock and Halifax Bank of Scotland contrived to wreck their banks without going anywhere near a casino. They proved once again that the surest way to lose money is to lend it to people who don't pay it back. The regulators let it happen.
