This sentiment is rooted in a common misconception: "the banks are fucked because banking is hard these days." Even my wife asked me this this morning - "is it because of debit cards and all the bill-pay stuff that the banks offer these days?"

Hell no. Debit cards are a profit center. The merchant gets fucked in the ass when you use any sort of "credit" - anywhere from 0.5% to 3% of the transaction (Target has said that their biggest single line-item expense is credit card surcharges). Billpay, meanwhile, is a customer-retention tool. It costs them nothing and makes you 80% less likely to swap banks if you have one or more bills in their system. These things that the banks are trying to charge you for are things that make them a fuckload of money.

Banks are in trouble right now for one reason and one reason only: the 1999 repeal of the Glass-Steagall Act.

Glass-Steagall, which was enacted in 1933 in response to the banking crash that brought about the Great Depression, does exactly one thing: it requires a bank to either be a commercial bank or an investment bank. Any given institution cannot be both. A "commercial bank" is a place that takes deposits, makes loans, offers checking and savings accounts, sells certificates of deposit and bonds and acts as a "financial intermediary." An "investment bank," on the other hand, "trades securities."

"Trading securities" is bank-speak for "playing the ponies."

Something most people don't realize is that investment banks don't play on the stock market. They play on the bond market. And while the stock market can be considered a largely-unregulated Bartertown of shady rules, scarcely-enforced regulations and wink-wink-nudge-nudge scams, the bond market makes the stock market look like the Supreme Court.

The bond market is pretty much run like a pirate's moot. The swashbucklers show up, swords in hand, and declare things to be true. If someone disagrees, they fight it out. Tables are overturned, drinks are spilled, maidens in bodices mop up the blood and at the end of the day money changes hands. The world bond market, by the way, is three times the size of the world stock market... and the US bond market is fully a third of it. CDOs and other "exotic trading instruments" were created by the bond market for the bond market. According to Michael Lewis, in fact, CDOs were created one fine tropical evening by a handful of Goldman-Sachs traders in a tequila-fueled bout of "creativity" while on a corporate retreat to Mexico.

You can't make this shit up.

Historically, "investment banks" were allowed to sink or swim based on their ability to pick ponies. That's why only "qualified investors" (someone with an assload of money) is allowed to play with them. Historically, "commercial banks" are places that you keep your money. That's why the FDIC insures them - because when you can't buy bread you're much likelier to rise up and overthrow the government. A $2m loss to a person with $4m is going to hurt a lot less than a $2000 loss to a person with $4000 and both governments and banks know it. Money is not a linear tool.

With the repeal of Glass-Steagall, on the other hand, Gordon Gecko is now allowed to use your retirement fund to make investments on AAA tranches of collateralized debt obligations made up of mortgages written based on fraudulent data. The commercial banks became investment banks. And all hell broke loose.

Had Glass-Steagall been in place for the financial bubble of 2008, a whole bunch of investment banks would have gone under and a whole bunch of institutional investors would have been fucked. But then, they would have deserved their fucking - that's what "qualified investor" means, the presumption that you f'ing read your prospectii and can recognize that you're buying a 55 gallon drum of snake oil. It wasn't though so all the financial hanky-panky from the Pirate's Moot spilled over onto your retirement fund.

Here, check this out:

http://www.youtube.com/watch?v=w2nZbo8SKbg

The money quote is

>“I think we will look back in 10 years’ time and say we should not have done this, but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010... We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”