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To be fair, Glass-Steagall isn't foolproof or even banker-proof. Risk will always be with us. Even plain-vanilla commercial lending can be risky if bankers relax their standards--remember the S&L crisis? JPMorgan was actually trying to hedge the risk of ordinary loans' going south. But, says derivatives expert and law professor Frank Partnoy, "splitting commercial banking from trading dramatically simplifies risk," since the former is more about knowing your customer and making decent lending bets rather than trying to keep track of a $360 billion investment portfolio that includes thousands of complicated hedges.
Bankers argue that the ability to hedge reduces that portfolio risk. But it brings us back to the too-big-to-fail problem--or maybe it's more too big to manage. "No human can understand the complexity of all the transactions that these banks are engaging in daily," says MIT professor Simon Johnson, an expert on financial regulation and an advocate for Glass-Steagall. "If Jamie Dimon, the best risk manager in the business, can make a mistake like this in a benign market environment, what happens to lesser managers when Greece fails? Or when the euro collapses?"
Who wants to find out? I'm all for re-examining the merits of Glass-Steagall and how it might be updated for today's market. The financial industry thinks it can continue to do business as usual and assume that we'll foot the bill when it all goes sideways. Having witnessed one meltdown, that's a risk I don't want to underwrite.