Nothing less than the total separation of retail and investment banks will do

"Never again will American taxpayers be held hostage by banks that are too big to fail," boomed Barack Obama in January 2010. "If these folks want a fight, it's a fight I'm ready to have".

Back in those days, the US President talked tough. Voters were angry that America's "world-class" banks had caused the worst economic reversal since the Great Depression - upending numerous businesses and wrecking millions of lives. Anger turned to outrage, as taxpayers then had to bail-out the guys behind the initial problem.

from_america: Liam- Another great article… "thank you." You obviously get it…  the American and British Governments are a sleep at the wheel… with pockets stuffed full of money and driving 150 mph headed to a cliff… as the World crumbles…

logan5: Great point but I think you need to get a couple more metaphors in

from_america: Forgive me as I'm just an old country boy… They fit… and people seem to like them, can relate and quickly visualize the concept you're selling without alot of double talk and a 500 word dissertation. However, if you want me to step up my game… and need more… let me know… I will oblige… And remember… "don't ever look back as something might be gaining on you"… and its not your stocks, 401k or interest rates… its the Americans and British politicians a sleep at the wheel… with pockets stuffed full of money and driving 150 mph headed to a cliff… as the World crumbles. Respectfully- from_america

frozentundra: Hurrah, A head to head comment off between Kamal " The Shill" Ahmet and Liam Halligan on bank restructuring. Very sporting of the Telegraph to set this up for us. I can't wait to see who wins the comments war.

freshfield: In the past three years we have seen an unprecedented crime unfold, one which has been allowed to occur under the guise of national economic security, politicians have shown crass irresponsibility with regard to the future of the nation, and the economic and social well being of the UK’s inhabitants. Our political elites have also missed one of the greatest opportunities to realign a system, which has created some of the greatest examples of inequality ever seen in modern Britain. The story is a simple one, it is all to do with how little people know about the mechanics and theory of money. What is money? Some seem to see money like water, something that is eternal and exists, it is simply ‘there’ most of us are so busy trying to actually acquire the stuff, we have little time to engage with the abstractions of what money actually is. We need it like we need air but like air if it becomes debased and polluted it becomes useless. Money is one of the human creations, which has taken on God like proportions, but in reality in real crisis it is no God, it withers and dies, and leaves us stranded like the most pathetic of fair weather friends. The illusion of value gone, for money is just that, an illusion, a stand in for value, an agreement, a receipt to honour a debt, but the receipt has become the item of value in our minds, and that has led to our dangerous and corrupted idolisation of money over real assets and producers of value. The monetary system has allowed those with a true understanding of the nature of money to acquire and appropriate real value in the form of assets such as oil, food, manufacturing, etc, etc. Money in its current form is tool for the rich, and a burden for the poor. If you have the resources and true assets with real value, you have little need to worry about monetary value, as the value of assets, will always locate their “monetary value” through inflation, or deflation, or whatever means are used to establish a value.

tamark: Liam, I don't agree with you very often, but you are spot on. Can you have a word with your colleagues at the DT, who appear to feel that the crash was anyone but the banks' fault, and everything is fine and dandy just as it is!

Guy Sands: Liam, I applaud you for your honesty and straight talking. Yet again, you tell it exactly the way it is. Please do us a big favour and go across the corridor to Kamal Ahmed's office and give that idiot a good hard kick in the nuts for constantly spewing pro-banking diarrhoea.

jimfish: Brilliant! Cheers Guy you deftly articulated exactly what I was thinking and made me laugh out loud.

lakelander: A gloomy article and it looks as though you are absolutely right in your predictions.  How frustrating that governments are not prepared to grasp the nettle.

truthseekers: As Economics Professor Steve Keen said "Bankers need to be put back in their boxes and kept there" -

nidjo: Bankers need to be strung up from the nearest lamp posts

tony88: and their assets sequestered by the state

gussiefink: There was a time when investment banks were partnerships rather than incorporated bodies protected by limited liability. If the investment strategies did not work out, not only were the assets of the firm at risk, but also the personal assets of the individual partners. That certainly acted as a brake on reckless behaviour. There is now a total disconnect between risk and reward; there simply is no down side to taking excessive risks. The separation between investment and retail banking should never have been removed, and the cry that having such a separation would mean that the cost of banking and borrowing for retail customers would be higher is spurious. Even if it were true, it would be a small price to pay in comparison to the trillions of dollars that we have all had to shell out at gunpoint to keep these bookies solvent.

lambofthegreen: People should be banging on about this. This is much more significant than the separation debate ( though LH is on the right side of that ). As you point out, limited liability is the wrong incorporation model for casino banking.  Private equity and partnerships could, and did, work well, even through the recent crash. The City would of course detest the suggestion; it would mean them footing their own losses, but that would change their behaviour and improve decisions on capital allocation in a trice, helping the economy as a whole.

gussiefink: Even if it is no longer possible to return to the partnership structure, there is no reason why the directors should not have to give personal guarantees. Ironially, the directors of  many small businesses are required by these same banks to provide personal guarantees, before they will lend them a penny. Obviously the the joint and several liabiliy partnership model is one that is less common today. Most lawyers and accountants operate under a limited liability partnership. But against that, they are not speculating for personal gain with their client's money. At least I hope not.

lambofthegreen: Where there's a will there's a way, mostly… Solvent plc.s can't be forced to change, but regulations could be brought in to make it financially preferable to change.  Going by recent events, and some obvious conclusions, these regulations would reflect healthy market realities.

ExcellenceFirst: lambofthegreen "The City would of course detest the suggestion; it would mean them footing their own losses, but that would change their behaviour and improve decisions on capital allocation in a trice, helping the economy as a whole" I fear it's not quite so clear cut as this. Taking away limited liability would certainly change behaviour, but whether or not it would "improve" capital allocation is something to be argued, not just asserted. Just because the existing system has gone wrong doesn't mean that a specified alternative would have been any better. It might be the case that a more risk-conscious regime would have prevented some of the bad decisions which have been made, but isn't it possible that it would have prevented some of the good decisions, too?  

lambofthegreen: It's reasonable to conclude that people will on average make better decisions if they consider equally the risk of loosing as well as winning.   The alternative is, heads I win tails you loose; the flaws in that do not need explanation.

tony88: I bet the captain of the Titanic would (have)agree(d) with that

bv: As long as risk takers are permitted to play with other people's money this folly will repeat itself. Senators Glass and Steagal did not put forward their Bill without just cause. And it was 1932. The naivety of Clinton was mind-boggling. The outcome, entirely predictable.

owainglyndwr: 'The naivety of Clinton was mind-boggling.' On the contrary Clinton knew exactly what he was doing by allowing the repeal of Glass- Steagall. It allowed him to expand his own political agenda. The Community Reinvestment Act of 1977 seeks to address discrimination in loans made to individuals and businesses from low and moderate-income neighborhoods. In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. On signing the Gramm-Leach-Bliley Act in 1999, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act". This linkage of repeal of Glass Steagall to mandated lending to low income neighbourhoods and business is important. Without it Glass Steagall would not have been revoked. A similar bill was introduced in 1998 by Republican Senator Phil Gramm but it was unable to complete the legislative process into law. Resistance to enacting the 1998 bill, as well as the subsequent 1999 bill, centered around the legislation's language which would expand the types of banking institutions of the time into other areas of service but would not be subject to CRA compliance in order to do so. The Senator also demanded full disclosure of any financial "deals" which community groups had with banks, accusing such groups of "extortion". In the fall of 1999, Senators Chritopher Dodd and Charles E Schumer (both Democrats) prevented another impasse by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act to allow banks to merge or expand into other types of financial institutions. The new Gramm-Leach-Bliley Act's FDIC related provisions, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.[ So in short future bank lending was mandated by political considerations towards the disadvantaged rather than the ability of the borrower(s) to repay the loan. Securitization initially was a process to spread this risk of sub-prime mandated loans off bank balance sheets. This 'risk off' process was negated of course by highly leveraged interbank lending when banks lent to those institutions that bought this junk. The contagion effect. Looking for the seeds of the second depression? Well the CRA expansion and the repeal of Glass Steagall is the place to start IMHO. Slick Willy was instrumental. Watch Bank of America carefully. There's a number of lawsuits currently pending. Concerning those securtized loans and those mortgages which underpin them. This sub-prime problem has never really gone away.  Simply because mark to market accounting of these assets has been suspended since the credit crisis in 2008. In the States the average length of time the foreclosure process takes is increasing towards 500 days. I would point out its only when this loss is crystalized (foreclosed) would the asset value be written down on the balance sheet.  So Liam is right . Split them. Do it now. The lunatics have already taken over the asylum. Time to throw them out and the political lackeys who have enabled this process. So the real economies in the west can grow. Its well capitalized good banks rather than insolvent zombies constantly asking taxpayers for more with their begging bowls and golden parachutes for themselves that will bring growth and jobs to the west.

from_america: owainglyndwr- Nice try… lay it all on the Democrats doorstep and walk away… Forgot this part and twisted a few others- FYI- from "Wikipedia"- The banking industry tried to repeal 1933 Glass–Steagall for over 20 years. The legislation to repeal was introduced in the Senate by Republican Phil Gramm and House by Republican Jim Leach and Republican Thomas J. Bliley, Jr. Chairman of the House Commerce Committee from 1995 to 2001. The House passed its version of the Financial Services Act of 1999 on 1 July 1999 by a bipartisan vote of 343-86 (Republicans 205–16; Democrats 138–69; Independent 0–1), two months after the Senate had already passed its version of the bill on May 6 by a much-narrower 54–44 vote along basically-partisan lines (53 Republicans and one Democrat in favor; 44 Democrats opposed). When the two chambers could not agree on a joint version of the bill, the House voted on July 30 by a vote of 241-132 (R 58-131; D 182-1; Ind. 1–0) to instruct its negotiators to work for a law which ensured that consumers enjoyed medical and financial privacy as well as "robust competition and equal and non-discriminatory access to financial services and economic opportunities in their communities" (i.e., protection against exclusionary redlining). The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November. On November 4, the final bill resolving the differences was passed by the Senate 90-8, and by the House 362-57. The legislation was signed into law by President Clinton on November 12, 1999. ----------------------------------------------------------------- It's a shared burden… mostly Neconservatives and Republicans. -------------------------------------------------------------------------- Oddly enough that same Republican Senator… Phil Gramm (former chairman of the Senate Banking Committee) since 2002 served as Vice Chairman of UBS AG a huge Swiss bank. That’s the banking company that bought part of the US Government taxpayer bailed-out AIG Corp., including the DJAIG Commodity index, in May of 2009. Senator Phil Gramm was also John McCain’s presidential senior economic adviser in 2008. Paul Krugman named Alan Greenspan #1 cause of the economic crisis and guess who was listed as #2… Republican “Senator Phil Gramm.” Guess crime really does pay… --------------------------------------------------------------

owainglyndwr: 'Nice try… lay it all on the Democrats doorstep and walk away… Forgot this part and twisted a few others.' Perhaps you missed this part. A similar bill was introduced in 1998 by Republican Senator Phil Gramm but it was unable to complete the legislative process into law. The point I was responding to was bv's claim Clinton was naive. He was not IMHO. Democrats saw an opportunity to further CRA regardless of the consequences. Republican Gramm's bill was dead until Democrats breathed new life into it. Agree there is shared responsibility, between politicans, bankers and regulators on both sides of the pond. Greenspan and his British student Brown have so far been treated very lightly for the mess they helped create. Nobody is going to walk away. The final butchers bill has still to be presented too and paid for by taxpayers. Now which version of QE will that be? QE 4, 5, 6 or more?

from_america: --------------------------------------------------------- Respectfully I say… we agree to slightly disagree over a few small parts. Doesn't matter… Yes, this is far from over… and I fear the end result to be 1930's style Depression.  Seems the Elites grand plan is a World Depression and they intend to make it happen.   They want to purchase the World on sale… make it one huge "Blue Light Special'… then buy two industries, countries, states or cities for the price of one.  Buy Rome and get Paris free… or buy LA and get New York free… uhmmmmm… on 2nd thought they might pass on that last one… might not be such a good deal? --------------------------------------------------------------

nidjo: Great article Liam. Nothing will change, the banksters have the politicians in their pockets, they have just given Cameron instructions to try and brow beat Medvedev (he is on a visit to Russia this week) into backing off corrupt businessmen and bankers in Russia, the Russian state seems to be impeding their progress in taking over that country too !.  The fact that none of these parasites are in jail speaks volumes,in fact most of them are still in their jobs…we need a revolution !!