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Updated on November 8, 2011

Banks. TheMoneyMadam knows what's wrong?

Protestors carry signs and bloggers tell us to move our money out of banks. Everyone hates the bank bailouts and even more the money they seem to make every quarter. No one wants to invest in banks, unless you are a real risk taker, because we know banks are shaky in spite of giving the "fat cats" big bonuses.

As simple income investors, we ask; "What is wrong with the banks?" Well I can tell you this ... a lot is wrong. Most importantly, banks are not banks anymore.

In 1999, I sat in my living room with several friends, some of whom were my clients, and I told them how upset I was at our esteemed law makers for tearing down the wall between commercial and investment banks. I told everyone that they no longer had a safe place to deposit their hard earned money.

Perhaps your experience with banks was similar to mine. Your local bank, which was a commercial bank, accepted your deposits and returned them to you at your request. It always seemed to me that banks would only lend their deposits to people who really did not need it. At least every time I tried to borrow money, they made it painfully clear that I had to have assets equal to what I borrowed or they would just show me the door. If a bank lent you money, they were really sure you could pay them back. After all, they were lending your deposits to me and they had to be assured you could retrieve your money.

You see in 1929 so many banks failed that the congress passed the Banking Act of 1933, better known as Glass-Steagall. One of the four key parts of that act created a strict barrier between commercial banks and investment banks. Commercial banks, your local banker, accepted deposits from hard working people. They paid you a little money on your deposits. The bank also could lend only a reasonable percent of their deposits to businesses. Most of these loans, as I noted above, were highly likely to be repaid. Investment banks, on the other hand would use money raised from really rich people and lend it to other really rich people. Both sides of this trade were risky. But your hard earned deposits were never in jeopardy due to bad bets by investment banks. Glass Steagall saw to that!

This separation of commercial and investment banks did not eliminate investment failures. In fact, FDIC, the Federal Deposit Insurance Corporation was created to actually insure your deposits. Of course that well intended action also was abused by the Savings & Loan industry during the 1980's. This was the same time frame when the barrier between commercial banks (some times organized as a savings and loan companies) and investment banking activities was eroded.

The barrier was solid until about the mid 1970's when bankers solicited our elected officials to weaken the barrier. Congress fell to their siren call and chipped away at Glass-Steagall until 1999 when commercial banks were allowed to use their deposits in the same manner as an investment bank.

I went to a bank today to make a change to an account that I use very little but I like the bank because it is close to my house. I meet the fairly minimal requirements of a no fee checking account so it is also cheap. During this episode at my bank, I was sold investment advice, insurance, and a credit card. Moreover, the bank wasted a ton of time paying a bank officer to fill out, by hand, new documents. A little software investment would save this bank so much money. No wonder it costs a big bank about $350 - $450 dollar a year to keep your money in a simple checking account.

Banks are not banks anymore. Banks are a farmer's market of investment and personal financial products and they are not even good at doing that. Therefore, banks have no choice but to make money in the investment business. They put your deposits at risk to do so.

What to do? You could try a credit union. Credit Unions are not allowed to issue stock. When you deposit your paycheck you become an owner. The hatred of banks has lead many folks to move their money to credit unions. Remember that money talks and the more money these institutions have on deposit the more they will be pressured to use it. Even some of these depositor owned institutions that can loan only 12.5% of their deposits, got into trouble lending your money to people who could not pay the loan.

We need banking over haul and it is not to find ways to bail out banks. Let us have institutions that will accept our deposits and lend only enough money to worthy borrowers that they can pay their customer service staff and that very small loan officer staff.

Very Truly Yours,

TheMoneyMadam author of


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