History & Now: Commercial Banks & Investment Banks

http://www.nytimes.com/2008/09/18/business/18wall.html?_r=1&ref=business&oref=slogin

Still, many specialists believe that the monumental events of the last four days herald a new period of painful change for the American financial industry — one that speculators are rushing to pounce upon. While Wall Street has gone through tough times before, only to emerge bigger and stronger, some question whether the industry can rebound quickly after using high levels of leverage, or borrowed money, to binge on risky investments. Those investments have proved to be disastrous. Worldwide, financial companies have reported more than $500 billion in charges and losses stemming from the credit crisis — a figure some specialists say could eventually exceed $1 trillion.

Merrill Lynch rushed into the arms of Bank of America this week in a deal that in some ways harked back to the past. During the Depression, Congress separated commercial banks, which take deposits and make loans, from investment banks, which underwrite and trade securities. The investment banks were allowed to do business with less oversight, while commercial banks operated with tighter supervision.

But after Congress repealed those Depression-era laws in 1999, commercial banks began muscling in on Wall Street’s turf. As the new competition whittled down profit margins, investment banks used more of their capital to trade securities and also began developing financial derivatives to fuel profits.