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With recent breathtaking events bringing the once-mighty Bear Stearns to its knees and shaking financial markets to the core, I can’t help remembering a time when the banking industry was fairly stodgy, operating on slim profit margins and an entrenched policy of conservative behavior. (Not that there weren’t occasional rule-benders.)

For many years, banking was mostly a sleepy enterprise, with deals being done that in no way rivaled the excitement and risk of Wall Street (investment banking).

Then Glass-Steagall crumbled. For those who don’t know, the Glass-Steagall Act of 1933 separated investment banking and commercial banking activities to try to prevent the great crash of 1929 from ever happening again. It also lowered risk for investors through the protective barriers it mandated.

The crumbling actually began earlier, but sped up in the mid-1990s as bank holding companies began hungrily acquiring investment banks. In 1999, The Gramm-Leach-Bliley Act was passed by Congress to legitimize the acquisitions and dealings that were already happening. It repealed the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies.

What I also think it did is turn once traditionally conservative institutions into free-for-alls, competing with each other as well as among groups within the companies themselves to show the greatest profits. But in finance, the trade-off for higher returns is called RISK.

And suddenly all the rules bankers learned in training programs (I graduated one of those) were turned on their heads. Long-standing loan formulas were stretched ever thinner. Riskier divisions began making loans some of the other divisions would never approve of. And as huge profits flowed from the now riskier areas, more rational voices were drowned out by the steady cha-ching of revenues.

And so many many loans were made to folks who never before would have qualified, and who, for the most part, were woefully ignorant of what they were getting themselves into. After all…would a bank really make a loan they couldn’t pay back?

We all know the answer to that now. Yes. And while Wall Street rocks and reels from the seismic shifts, real people are being thrown to the ground amid the turmoil, losing their savings and their homes.

Our banker used to be the person we could trust to help keep us grounded – not flying high well beyond our means. Banking is about fiduciary responsibility and not the roller coaster rides of Wall Street. Unfortunately the two got mixed up and greed was allowed to run wild.

I hope now we will think again about the value of sound regulations and fiscal responsibility – and about the insanity of letting markets make their own euphoria-fed rules, without any entity strong enough to speak up when things go sour. Many of us saw the signs years ago and did speak up, but no one dared do anything to stop the wild ride. Free markets and all that, you know.

Well…they sure aren’t free now. They are costing all of us a fortune – with the end of this financial horror story still to be written. And the people paying the highest price are the most vulnerable of us all. Just shameful.

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Note: This was taken in part from a previous post.