Today the US Congress is holding hearings about the losses of the “London Whale” at JP Morgan. The senators are grilling the managers (and former managers) of Morgan, essentially asking “How can this happen? How could your traders lose all this money without you knowing about it? How can the taxpayer be held responsible for any insolvency that arises because of it? What about all your innocent investors? What about the people who deposited their money in your bank and trusted you?”

The problem is that the Congressmen are asking the wrong question. The company that they are talking about is actually JP Morgan Chase & Co. This company was formed by the various mergers and acquisitions of JP Morgan, an investment bank, and a number of commercial banks. These banks included (under their original, and not necessarily exact, names) Chase Manhattan, Chemical Bank, First Chicago, NBD Bank, and Bank One, as well as the banking operations of Washington Mutual.

The issue here is that commercial banks are what most people think of as a “bank”. Commercial banks take deposits from people and offer them checking and savings accounts. They exist to give people a “safe” place to keep their money. They may pay interest to these people for keeping their money in the bank. They make the money to pay this interest by making loans to individuals and to companies. The individuals use the loans mostly to buy houses. The companies use the loans to start or expand their businesses. Both then pay back their loans with interest, allowing the banks to earn money, both to pay the interest on accounts and to earn a profit for their owners.

In making these loans, banks are required to maintain a fiduciary responsibility, i.e. to make these loans only to individuals and companies whom they believe will pay back these loans. Thus, they protect the money of their depositors.

But that’s a commercial bank. An investment bank, on the other hand, exists to make profits for its investors, who are the same as depositors in a commercial bank, i.e. they deposit their money with the bank. The difference is that a depositor in a commercial bank puts his money in there primarily to give it a safe place to be held, whereas a depositor in an investment bank puts his money in there so that the bank can make him a profit.

And that’s the way it was for a long, long time. The two types of banks existed separately. You put your money in a commercial bank account to keep it safe (instead of in your mattress or in a small safe in your home, for example) and you knew it would be there in your savings or your checking account when you needed it. Maybe you would make a little interest on the savings account, and so your savings would grow over the years, even beyond the amount you deposited. But, primarily, you were sure your money would be safe.

If you had some extra money, you might deposit it, or “invest” it, with an investment bank. Here it would be much like putting your money into the stock market. You weren’t putting it in to just keep it safe, you were putting it in in order to make a profit. You were counting on the investment managers and traders of the investment bank to be better at making investments than you were. Thus, they would hopefully make more money for you than you could make yourself. Investment banks, on the same note, knew that they were in a risky business. They took on more risk than a commercial bank would in order to make a higher profit buying and selling stocks or other investments than the commercial bank could, because the commercial bank had the primary responsibility of keeping its deposits safe, that is, without much risk.

Realizing this difference, investment banks would normally only take deposits, or “investments”, from higher-worth individuals, who were presumed to have a better knowledge of the risks of investing in the financial instruments that the bank traded. A commercial bank, on the other hand, took deposits from anyone, in any amount, because they were more interested in keeping their money safe, and so were not as interested in making a lot of profit on their deposits.

Now all this changed in the 1990’s. Previously the Glass-Steagall Act of 1933 had kept commercial and investment banks separated. Over the years, however, the bankers, particularly those in the large commercial banks, became more and more envious of the returns available to the investment banks. They were no longer content to keep their depositors’ money safe and make a little profit from the loans they made. They wanted the larger returns that the investment banks were making. So every year they edged a little closer and closer to the investment bank model. They lobbied the Congress and other lawmakers to allow them a little more latitude in what they could do. Finally, in 1998, Congress passed the Gramm-Leach-Bliley Act, which made it official. Commercial banks could now merge with investment banks if they so desired, or use the same financial instruments as the investment banks.

The commercial banks got what they wanted, the option to risk their depositors’ money in order to make higher profits. The investment banks got their wish also, the ability to tap the rich financial resources of the depositors’ accounts.

What did we end up with? The crash of 2008-9 and the banks that had to be rescued by the federal government (meaning you and me) because they were now “too big to fail”.

And so, on March 15, 2013, the Senators are questioning management of JP Morgan Chase about the money that the “London Whale” lost in a bad trade. But maybe they should be asking themselves why THEY allowed all this to become a public concern.

If JP Morgan was still a private investment bank, this would be a question of money lost by investors who knew what they were getting into. It would be an internal matter of a private company and its investors, who knew what kind of risk they were taking. Instead, it became a big loss to a bunch of depositors in what was now JP Morgan Chase & Co., most of whom didn’t have any idea they were taking on that kind of risk when they put their money in their savings and checking accounts.

So here we are again, worried that we’re heading into another banking crisis.

I say, if the lawmakers want to know whose fault the “London Whale’s” losses are, they should take a look in the mirror.

Bobonomics says, “Bring back Glass-Steagall!”