Investment Banks Broken & Liquidity Dried up - Cats Fat & People Pay: History Repeats

I've been watching the financial markets with some interest in the last few weeks.

My children were asking me what happened to these banks - which caused me to try explain how banks work to them in simple terms - as if I really understand it!

I told them banking was a great business: you take deposits for savers / investors, and promise to keep it safe - or at least safer than putting it under the mattress. You know that actually all the people will not want all their money all at one, immediately - and so you can start lending it to people for interest or in Islamic banking, for a share of the profits. Usually you lend on the back of assets - so if someone cannot pay their mortgage you get to keep, and dispose of the house.  i.e. Commercial Banking. I explained what these banks did wrong was lend to people that were not going to be able to pay them back, and had bought houses that were not worth as much as the original loan. Duh!

So what about investment / merchant banks - well these firms help companies, raise money by issuing shares in their company, or (Corporate) bonds, and advise on sales / purchases / mergers of firms, and trade debt!

Until de-regulation on the 1980's and 90's investment Banks were kept separate from commercial banks - these were separated after the crash of 1929, and heavily regulated. So it should not come as a surprise that one of the factors causing the 1929 crash was securitisation of credit - i.e. the same re-packaging of risk-laden debt. ( http://snipurl.com/3smwt  [www_prospect_org] )

I'm certainly no expert, but it seems to me that Investment bankers, and associated businesses, have grown fat off fees trading debt, and now the people will pay:

1. Shareholders have lost out e.g. Fannie Mae Freddie Mack, HBOS

2. The FED, and other (UK) government agencies look like they will be bailing out these firms ( http://snipurl.com/3smyk  [www_timesonline_co_uk] ) - this will be several Trillion USD to add to the already Trillion plus committed

3. Recession - when companies like Taylor Woodrow fail to get funding ( http://peek.snipurl.com/3smzh  ) the economy will slow down and likely decline

4. unemployment will follow

This morning, just days after various governments made if illegal to "short" financial sticks, I hear the remaining two independent Investment Banks are to become commercial. I certainly will not be queuing to deposit my funds with them - if their balance sheet is so solid why are they changing their model to start taking deposits?

Fifth on the list on the ways the general public will foot the bill could commercial banks going bust, Time to ensure no more than 35K GBP is on deposit with any one (UK) licensed institution ( http://snipurl.com/3sn1n  [www_fool_co_uk] ) , and  and I'm going to transfer assets to somewhere safer, like the First Bank of Nigeria (sic) !