Functional Banks

Banking serves an important role in the economy: it distributes money efficiently (when it works). People who have extra money put it into a bank, and that bank loans it out to others who need money (for things like cars, houses, ginormous tv's...). People who borrow money pay interest and the people who deposit (lend) money receive some portion of that interest. The difference goes to the bank, which uses it to pay employees, maintain infrastructure, et cetera.

When working well there isn't much extra past that because if there were, then some other bank would pay better rates to depositors and depositors would take their money and put it there. Banking should not be a very profitable industry, and it isn't. That's where investment banking comes in.

Investment banking supposedly does something similar (for our economy) to what regular banks do, but borrowers (and "depositors") are bigger and sometimes so are their risks. Investment banks sell securities to investors. Those securities are essentially loans to others. Investment banks are serving as intermediaries (like regular banks) but with no risk. If a loan (security) fails to pay out or plummets in value, it is the investor that is out the money. Investment banks do not make money off interest, but rather fees.

If a loan fails, the bank is out $, which motivates it to determine that the borrower is not likely to run out and that the collateral is sound.

For an investment bank, there is no such motivation. There is, however, a duty to give accurate and complete information to their clients (investors). But the motivation is to make that information as complicated and difficult to understand as possible so that they can sell any investment (good, bad, or otherwise), and so that they can hide true costs and pocket larger fees through the sales.

Pretty much all of the failures that occurred with respect to the financial crisis are due to investment banking. It is true that conventional banks were part of that, but that was simply a function of this murky securities market, and the wall separating the two (part of Glass-Steagall) being eliminated.

Since Glass-Steagall is not being restored, I fully expect this to repeat itself.