There was an interesting article in The Australian. Looking for answers after the debt binge, on Saturday, 17 September 2011. Don Argus, former CEO of NAB and the doyen of Melbourne directors, argues that the current agreed fix of increased regulation is totally misdirected. Instead he contends is that is that commercial and investment banking needs to be legally separated as was done under the Glass-Steagall regime that existed 1933-1999 in the USA. Argus argues that no commercial banking board really understands investment banking risk, and then investment banking assets should not be a on a commercial bank balance sheet that comprises depositor funds.
There is another reason why Argus’s proposal should be adopted and that is the different temperaments of the investment and commercial bankers. I have worked in the Financial Services Industry for over 25 years and investment bankers are dominated by the Hustler component. They are driven by the desire for material success, and listen to only one radio station: WIIFM or What’s In It For Me. They will sacrifice the long-term good of the organisation in order to increase this year’s short term bonus. They love engaging in deals particularly they contain an element of gambling. They push the envelope of the law to the limit. Does any of this sound familiar to you?
On the other hand the Doublechecker and Normal components dominate the temperament of commercial bankers. They are driven by the desires for order and security. Doublecheckers are naturally risk adverse and cautious and seek long-term stability. They take time and make considered decisions; but when you are dealing with other people’s money this is not a bad thing. Doublecheckers want capital protection and when completing a transaction seek a second way they can recover the capital of loan if something goes wrong. Hustlers on the other hand are dominated by the potential income and possibility of increased annual bonuses.
The problem is what happens to an organisation when you mix these two components. Simply put Hustlers have a core emotional drive to be number one while Double-Checkers are happy to be good number twos. Many Hustlers also have the charm and social skills to manoeuvre themselves to the C-level. Hence the Hustlers rise to the top as has happened in the financial centres around the world but particularly on Wall Street. Hustlers approve highly leveraged and risky transactions on the basis that it will increase the return to shareholders. The only constraint that prevents Hustlers engaging in such activity is if it is illegal (and even then, they will often step over the line).
Any endeavour to reinstate Glass-Steagall is fraught with difficulty. Attempts in the USA post the GFC failed miserably. In 2010 the Banking lobby (dominated by Hustlers who are persuasive and charming) managed to quash efforts to re-introduce the core Glass-Steagall concept of institutional separation. The major US financial institutions such as Bank of America still have interconnected commercial and investment banking arms, and when the next GFC strikes will again approach governments for a bail-out.
Don Argus is right about what needs to be done. Unfortunately one cannot see the current crop of politicians having the spine to take such action. Instead they will continue to introduce reams of regulations under the pretence of doing
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