Tonight:
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Governor of the Bank of England Mervyn King and US Treasury Secretary Hank Paulson both in their different ways said last week that once this credit crisis is dealt with, there will be no going back to the old ways. There may be tighter regulation across the board, capital adequacy rules imposed on investment banks and even a move once again to separate commercial and investment banking activities as they were in the US under the Glass-Steagall Act from the 1930s right up to the 1990s.
What precisely will be different was not spelled out by these pillars of the financial community, and need not be at this stage. But all the above ideas are being talked about, and others will no doubt surface in the next few months.
The interesting thing is that so many senior figures in the investment banking business still don't seem to get it. They still seem to be in denial, unaware that things will never be the same again. Business as usual was the message of the £21 million collected by Bob Diamond of Barclays Capital, making it look as if BarCap is in a different world and bears no responsibility for the financial crisis threatening to engulf the Western world.
Itwas also the message from JPMorgan Chase's Jamie Dimon as he promised to dish loads of cash to the best of his new Bear Stearns employees to persuade them to stay loyal. Neither seems to realise that the investment banking model where trading revenues are the major driver of profitability is broken, perhaps beyond repair.
There are two strands to this. The first is that is has become clear why Glass-Steagall was needed. Commercial banks came into existence to collect retail deposits and lend the money out over a longer time horizon. Their core skill is the assessment of risk, and that expertise is (or was) vested in the credit officer and the credit committee which assesses the likelihood of the bank getting its money back.
Trouble is this is difficult work and low-margin. If a bank is making only 1% on its loans, then after interest on deposits and costs are taken into account, one loan in 100 going sour wipes out the profit on the other 99. As a business, it is a million miles from gambling - which is the trading investment bankers do stripped of the euphemism. Trading is quite different from investment because it is a zero sum game in which every gain for one party has to be matched by a loss for someone else. But it is undeniably exciting and, in bull markets particularly, it can appear that everyone is a winner.
The result is that if commercial banking and investment banking are allowed to exist side by side within one organisation, the investment banking tail will wag the commercial banking dog. Not only is gambling more exciting than banking but it also appears to deliver more rapid growth in profits - so it provides the improved performance that the investing community craves - and the executives with their share options and incentive schemes are biased to deliver. That is why 20 years ago the credit officer was God in Citigroup, and today you would be hard pressed to find one.
But this is a two-way street. Just as investment banking has corrupted commercial banking, so the presence of the commercial bank changes the behaviour of the investment bank. The fact the investment bank can make use of the commercial-bank balance sheet not only allows it to take ever-bigger bets but also lets it use that balance sheet to do deals with no external economic rationale, but which are done only to give the investment bank teams something to sell. Their sales desks are gigantic furnaces that have to be fed. The main bank balance sheet can be hijacked to feed that appetite.
The combination of these two pressures have delivered the current mess. It allowed the distortion of conventional lending practices so banks no longer had to care whether or not they got their money back because they had sold that risk on to someone else, having earned their money by charging a fee for fixing the loan in the first place.
It allowed traders to deal in volumes and at a scale they had never before imagined. It created an environment where finance became an end in itself, a parallel universe. The very essence of the financial sector is that it exists to facilitate wealth creation in the rest of the economy. This crucial fact was forgotten. The wheeling and dealing became an end in itself because it appeared profitable. What was overlooked was that because there was no genuine end user, all that profit was a mirage - wealth transfer not wealth creation.
In a decade or two, people will look back on the era we have just lived through and wonder how anyone thought these salaries and bonuses could be justified, and how an investment banking business of this kind could be sustainable. The problem is getting people to realise it now.
