2016 Postmortem
In reply to the discussion: Hillary Clinton opposes breaking up the megabanks, opposes reinstating Glass-Steagall [View all]Let me explain it in simpler concepts using right and left hands Assume I am worth $150. Then, you give me $50 bill which I am to return to you. It is a general liability of mine.
I promise not to gamble "your money" so I will not go to Vegas with your bill and put it on a black jack table in Vegas. Therefore I am not gambling your money. This is what I am doing with my right hand. I am putting your money/bill in a drawer and promising to give it back to you when you ask.
Meanwhile, I call my bookie and make a leveraged bet with him. Generally it could only cost my $150 but under certain circumstances, I could lose $200 or more because my activity was leveraged.
This is what my left hand is doing. Now the worst happens (my bet is lending leveraged money to foreign investors or underwriting and offering). When the bookie or creditor comes to collect, he does not distinguish your bill and my money. Nor does the law distinguish between my money and your bill. He takes the money I owe him. I still owe you but I have no money to pay you. This activity although not directly tied (I didn't gamble your specific bill) put your deposit with me at risk.
This was the purpose of Glass Steagall when it says it seperated the banking and investment banking divisions. It separated risky activities from the banks which were the holders of insured depository capital. If an investment bank were to fail, it could not take down the whole system.