How corporate banking works

In the 1990’s, the Gramm Leech Bliley Act was introduced by Congress. It essentially undid important provisions from the Glass Steagall Act, which was enacted in order to prevent another Great Depression.

The long story short is investment banks, deposit banks, and insurance companies should always be separated. GLB broke down those walls, allowing the companies to merge and become “too big to fail.”

The answer lies in researching the reasons for enacting Glass Steagall after the depression in the first place.

Here’s an example of why it’s so bad:

If your home burns down, the only party protecting your interest against the insurance company, forcing them to pay the contractors to clear the rubble and rebuild your home, is the bank, because they have skin in the game.

When your bank is the insurance company, as is the case with force placed insurance (also known as lender placed or collateral protection insurance), there is no incentive to help you.They instead delay payments, etc. Katrina victims are still fighting to rebuild. After that, there were dozens of disasters. It’s been nearly a decade.

Now, say an investment bank is also a deposit bank. Now you have our deposits funding a form of gambling. This is how mortgage backed securities came about. Essentially consumer mortgages were bundled, and investors bet on whether that bundle would make money similar to a stock on wall street.

This led to a situation where making investors money became more important than the deposits performing. It essentially became profitable to foreclose.

Add to this mix a combination of restricted government powers in a deregulated environment, and you have a recipe for disaster.

Also keep in mind the banks aren’t as easy to monitor as you are. You use consumer software – you’re easy to track. The banks use dozens of multi-million dollar software suites each. Even if a Bradley Manning type (I.e. me) came along and leaked files, nobody would have the software to read those extensions. If they did, they’d simply be looking at lists of numbers on reports that feed into other numbers. Each report is designed to feed other reports and fields in such a complicatedway, you’d have an easier time deciphering a dead language.

A forensic accountant at the SEC only needed to know maybe two systems to begin deciphering WorldCom, Enron, etc. To audit a bank would take knowledge of a dozen systems each.