Why Doesn't Reputation Matter on Wall Street?

link here to article

Alan Greenspan claimed that he was shocked to learn that Wall Street bankers did things that put their reputation at risk. He believed that the need for a firm to protect its reputation was sufficient to insure good behavior and that regulation was unnecessary. Market discipline replaced regulation in his mind.

Well Wall Street bankers have certainly lost their reputations but it does not seem to have hurt their business. I have been thinking about that question for some time. Why do customers keep coming back to bankers who sold them securities that they knew to be toxic? Yves Smith reviews a NYT article on that topic and she provides her own answers. She traces the problem back to the time that Wall Street banks went public. Partnerships have to be concerned for the long term because their money is at risk, not the shareholders, and because they depend upon eventually selling their share of the business to junior partners who must keep the business going. That provides one of the reasons for the change in behavior. The other reasons have to do with the growth of the credit and derivative businesses. The shift in that direction made traders, who are predatory by nature, the stars of the business and bonuses were based on short term performance. It wasn't necessary to become a partner to make lots of money and the partners were not dependent on selling their share of the business to junior partners who would nurture the business.

That analysis helps to explain the change in behavior but it does not explain why customers stick with them. Smith argues that customers have no choice. There are only a few banks that have the resources and scale to deal operate the credit markets and the OTC derivatives market in unregulated so customers cannot figure out what they are buying or how much they are paying for the derivative contracts. In other words, monopolies are good businesses. Profits are terrific and customers have no where else to go. It doesn't matter what bank you deal with if they are all predators. Thats where having the right people in place between the bank and the customers is important. Perhaps personal relationships are the only things that really matters.