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Commercial and Investment Banking: The Tortoise and the Hare

"If you had asked me a decade ago, whether the commercial or investment banks would win out when they repealed Glass-Steagall, I would have said the investment banks," opined a lawyer friend of mine last year. And yet the only "banks" left standing are the commercial banks.

The investment banks were faster, more agile, more profitable. They typically hired the smartest MBAs from the Harvard Business School, or students from equivalent schools such as Stanford or the University of Chicago, elsewhere in the country. With all their advantages, they should have succeeded, except that they overleveraged, and "blew themselves up" in the subprime crisis. Smart as they were, the investment banks, and their employees were "too clever by half."

The commercial banks were slower, and more bureaucracy heavy. They hired the more pedestrian MBAs from the top business schools, or the better people from more pedestrian programs.As such, they could seldom outtrade the investment bankers.  Eventually they fell into the same subprime trap as the investment banks and were lucky to survive. But survive they did, because they were "smart" enough to package and sell most of their worst mortage loans to the investment bankers for resale to investors.

The best illustration of how the two types of banks worked is the hoary story of the Tortoise and the Hare. The hare was the faster runner. But he 'blew himself up" by falling asleep before the finish line. The tortoise proceeded at a slow, leisurely pace and won.