The Banking Act of 1933, better known as Glass-Steagall, separated banking from the securities business. This provision was repealed in 1999.

The most important effect of the repeal has been to make the large banks behave much more like securities firms.

Although the differences between commercial banking and investment banking may have faded from memory in just 11 years, these differences are real, and the separation between the two industries was rigorously enforced and adjudicated for 66 years, seemingly without any detriment to economic efficiency or American competitiveness.

The most fundamental difference between commercial banks and securities firms was that commercial banks predominantly operated continuous, primary account relationships with customers, such as checking accounts and corporate loans. Securities firms, as they had evolved in recent decades, depended instead on individual transactions such as proprietary trading and issuance of bonds.

There had earlier been large securities firms, "wire houses," whose revenue came predominantly from customer account relationships. Most of these firms, including Merrill Lynch, had become investment banks by 1999, with principal trading and securities issuance as main activities. That is what is now happening to large banks. Same result: potentially higher return, but higher volatility and risk.

As compared to banks, securities firms were far more cyclical but often more highly leveraged. Their safety and soundness were not regulated. Their managers were much more highly compensated, but the successful firms rigorously controlled their total expenses. Competitive advantage was seen as depending on trading strategies and skills and on creativity in securities issuance.

Over the years of separation, there were two areas of serious competition between banks and securities firms. One was financing of corporations and government entities, and the other was wealth management for rich individual clients. In both of these, banks lost major market share for decades. A lesson appeared to be that the securities firms were smarter, more nimble, and able to offer superior incentives that attracted better management.

Because commercial banking was a very much larger industry than securities, a reasonable expectation in 1999 was that the banks would buy at least the major securities firms, allegedly in order to offer full-spectrum services to individual and entity clients. Synergy would be profitable. And then, "so what?" since regulators would continue to protect banks against taking unsafe risks.

This view proved to be myopic. What has happened is that investment bankers have taken over leadership of banks, and made banks more like securities firms.

A recent example: Stuart Gulliver, the new chief of HSBC. In a recent Financial Times interview Gulliver recalled his first job at HSBC, in a trading room. (Outside the U.S., HSBC was not subject to Glass-Steagall.)

"You were accountable for your own actions and you had to be quick," which was why he liked the job, Gulliver said. He was a "brilliant" trader. Commercial bankers aren't at all like that.

One of Gulliver's first moves as chief executive was to cut back or eliminate growth in HSBC's flagship personal banking product, Premier. Too expensive to operate.

Damned right! How many more times does it need to be demonstrated that attracting wealthy people's banking business doesn't give you access to their investment business? But retail banking can be profitable — for instance, at Wells Fargo.

Gulliver said that if he hadn't been chosen as chief executive, he would have left and started a hedge fund. Vikram Pandit, Citigroup's chief executive, actually did start a hedge fund. He sold it to Citi, and it subsequently collapsed, causing a nine-figure writeoff.

Compare this with the background of Mike Geoghagen, Gulliver's predecessor, unceremoniously ousted. Geoghagen, like Gulliver, had been a consistently successful executive. But his successes were in turning around and building HSBC's banking businesses on several continents, particularly in South America. It's hard to imagine that he ever held a job in a trading room, or would run a hedge fund.

Wells Fargo is an exception. John Stumpf, the new chief executive there, worked his way up in retail banking, and was most recently executive vice president of community banking. Wells is seen as the national leader in relationship retail banking. For instance, it seldom issues credit cards to people who aren't already customers. One of Stumpf's predecessors would meet with each of his new branch managers and tell him: "Your branch is the bank."

But my predictions that the systemically important institutions will come increasingly to be led by people with a securities orientation. These banks will intensify their focus on trading and securities issuance, with less emphasis on primary account relationships. Compensation will continue its inexorable rapid rise. More mortgage securities. More creativity with instruments such as auction-rate bonds. More exposure to the risks that brought down Merrill, Bear and Lehman.

Will all of this be good for the deposit insurance funds, the banking system and the economy?

Andrew Kahr is a principal in Credit Builders LLC, a financial product testing and development company. He was the founding chief executive of Providian Corp. and can be reached at