“Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.

“Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.

“If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.

“Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.

“The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.

“Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.”

The McCulloch teaching is as relevant today as it were in 1863. Accepting and managing society’s saving is a sacred responsibility bestowed by the legislator exclusively upon commercial banks. Investment, insurance, and brokerage firms are not banks and their executives are not bankers. That investment firms are called “banks” is a misnomer. Investment executives will not be called bankers here.

The deposit-taking culture of commercial banking contrasts with the culture of investment companies. As custodians of society’s saving, commercial banks are highly regulated. Their funding is sourced primarily from people's deposits. By contrast, investment firms are prohibited from seeking customers’ deposits (they fund their operations from the money markets); thus, they are less regulated. Different funding sources and regulations evolved into two very different cultures, value systems, temperaments, and personality types. Commercial bankers are typically dedicated to steady, long-term banking relationships with depositors and borrowers. Bankers are taught to observe caution in risk management and to view risk control structures with respect. They earn relatively modest but comfortable salaries. On the other hand, investment executives are aggressive, short-term transaction-by-transaction oriented salesmen. With performance-bonus schemes, high risk-taking tendencies, and scant training in risk analysis, investment executives regard control structures as an impediment to profitable deals. To such executives, commercial bankers are “boring” and “unimaginative”.

The current debacle is a result of the collective failure of greedy lenders, negligent government supervisors, obsequious internal auditors, submissive external auditors obsessed in lucrative consulting contracts with the companies they audit, as well as those pontificating rating agencies’ “experts” who are always one step behind the events and who get paid by the firms they rate.

To protect national saving, investment firms must be kept away from commercial banks. The repeal of Glass-Steagall Act was the primary mis-step in creating the conditions, which resulted in the crisis we face today. Astonishingly, in the midst of this unraveling crisis, two investment firms, Goldman Sachs and Morgan Stanley, were upgraded by the US Federal Reserve Bank to become banks. I predict that this will prove to be another grave mistake.

The wall around commercial banking must be rebuilt. Reviving the provisions of Glass-Steagall Act is crucial. Strict governmental control over commercial banks must be restored. External auditors should perform one function only: auditing. Management consultancies should be separated from audit firms.

The practice that grew in recent years of compensating senior executives with mainly performance bonuses has had disastrous repercussions. Performance bonuses can be soul destroying. In their pursuit of self-enrichment, executives are tempted to not only cut corners on professional and ethical standards but also ignore the spirit of the law, and even violate the law (in the hope that they’ll never be caught). The monumental losses that surfaced in 2008 render the billions of bonus dollars paid to executives a travesty. Performance bonuses have also created obscene disparities in employee compensation within even the same bank, between the managers of the investment divisions, on one hand, and the managers of the commercial banking divisions. Such disparities of incomes replaced the old institutional culture of loyalty, commitment, and collegiality by a culture of disloyalty, exploitation, and I-only-work-here syndrome.