Today we return to a well-worn, if favorite, subject: the rosy-fingered, golden-hued, more-imagined-than-real past. This is a common theme here. The past is a well-stocked grocery store without a cashier. In other words, it's open for plundering. And since the owner seems also to have departed, no one particularly cares if you can lumber off with a nice flat-panel television screen and a year's worth of mac and cheese. Take what you like; no one's watching.
We begin with a nonlegal piece by DealBook's M&A legal whiz, Steve Davidoff, published Wednesday, chewing over the decline in the power of reputation on Wall Street. "Reputation is dead on Wall Street," he writes, starting us off with a chaser of hyperbole. Death being a permanent condition, and a condition one does not usually recover from, that's a serious charge, though he's quick to admit that Wall Street firms also occasionally "commit foolish misdeeds," which suggests they are both irremediably amoral and sometimes stupid.
Davidoff then trots off to enumerate the various reasons for this decline in reputational equity, which is about as obvious as the fact that spring has arrived. What are the causes? Size. A transactional mentality. A lack of cozy partnerships. And the fact that big shots -- despite jumbo banks and a lack of cozy partnerships -- "socialize together, work together and are much more willing to disregard individual failures because, after all, they are friends." Let us return, he seems to suggest, to a day when people who work together didn't socialize, befriend each other or, well, even actually toil together much.
Davidoff does skip past one big cause of this dip in rep: the financial crisis. Perhaps the meltdown, the bailouts, the credit crunch, the recession are just too obvious. The fact is, no one can argue about the broad outlines here: Wall Street over the last three years has been ritually tarred and feathered for a variety of sins, real or imagined, deserved or not. But the mere fact of reputational decline isn't Davidoff's real subject. As soon as he introduces it, he immediately jaunts off to suggest that the real problem is that no one seems to care, including Wall Streeters, that their reputations have been besmirched: They keep on working! People give them jobs! Clients still flock to them! They don't get humiliated, incarcerated, enjoined or imprisoned! In other words, this is a variant on the, "why don't they apologize en masse" meme.
Still, the real problem with Davidoff's excursion here is the relatively narrow one, that once upon a time there was a Wall Street that consisted of wonderful, quaint, Dickensian-style partnerships. Firms were small. Partnerships were tiny. Partners could gather and stare at each other in smoky, leathery, partner rooms with gloomy ancestors staring down from the walls. Morgan Stanley had only 31 partners, he says, in 1970. Small groups of bankers could not operate without continually buffed reputations. Sure, Goldman, Sachs & Co. got into hot water in the '30s, but then its partners spent the next 30 years apparently worrying about what people thought, which Davidoff seems to think is important. (It goes without saying that he doesn't believe that Blankfein et al. spend any time worrying about the firm's current reputational pothole.)
Well, the subject here is quite complex. It may well be true: When firms were smaller and partners were few, there may well have been far more attention paid to reputation. After all, these small firms made nearly all their money arranging financings for corporations; long-term relationships were everything. Everybody knew each other. Business was personal; firms carved up the social landscape: There were Jewish firms, WASP firms and Irish firms. But what Davidoff does not say here is that this little world, for all its apparent gentility, was a closed shop, a club, a nepotist's dream. There was little competition. Morgan Stanley presided at the top of major underwriting syndicates (and their tombstones) not because it was necessarily skilled but because that's the way it had always been -- and Morgan Stanley radiated clout, if not economic than social and political power (through the New York Stock Exchange, the boardroom of the club) that went back to the dominant days of the House of Morgan.
This was not a meritocracy; nor was it efficient. Customers were not usually exploited by individuals or firms; they were worked over by a heavily regulated system of fees and kickbacks. Innovation, efficiencies, price competition, technology were more than frowned upon, they were discouraged or banned -- at least until the emergence of institutional investors shattered the club in the '70s, ushering in our current, less-than-perfect if relatively competitive and open system.
This, then, is a complex history, and the role of reputation is, at best, ambiguous. It's quite easy to worry about your reputation if your position in this world is fixed by birth, by name or by association. It's quite simple to emphasize reputation when regulation and peer pressure define your field of action. Meanwhile, Davidoff is worried that too many big shots socialize together today.
The elusive subject of reputation, its rise and fall, also plays a big role in what seems to be a blog post dispatched to my e-mail Tuesday by Institutional Investor. This post shares in the same nostalgia for a golden past that Davidoff displays.
Institutional Investor's Steve Rosenbush offers up a meditation on Goldman Sachs with the headline: "Is the Era of Goldman Sachs Exceptionalism Over?" Actually, the question mark here seems to be simply a courtesy; Rosenbush is pretty sure it is, as he unrolls all the negative talking points about Goldman that have been made since the financial crisis: the bad press, the congressional grillings, the Lloyd Blankfein missteps, the threat of Dodd-Frank and, yes, overall, the damage inflicted by reputational decline and civil suits, which Rosenbush, presumably allaying Davidoff's fears, thinks has spawned a reputational crisis with real consequences. For all of that, however, Rosenbush mostly pins the end of the golden age of Goldman on the evidence of the most recent quarter's results, which were soft, particularly in the firm's giant fixed-income operations.
Let's be up front: Maybe Goldman is screwed. Maybe its best days are behind it. Maybe it will no longer be the bellwether, the standard setter, the top of the Wall Street cabinetry. It's possible. But what does "exceptionalism" really mean, and in Goldman's case when, exactly, did this exceptionalism begin? With Rubin and Friedman? With Corzine, who had a bad year or two? With Paulson? With the partnership or public company? After all, Goldman for about 60 years was a shrewd little partnership that, for all its virtues, was hardly "exceptional" in Rosenbush's terms.
Are we talking "exceptional" in profitability, power, connections, trading prowess or investment banking coverage, creative dealmaking, recruiting? I seem to recall only a few years ago, when Goldman and J.P. Morgan Chase & Co. sailed through the financial crisis scarfing up massive profits, that the pundits were declaring a great threat to the Republic because they would now be able to cement their pre-eminence forever and ever.
I seem to remember cries that Morgan Stanley, after some lousy quarters, was threatened with permanent second-tier status. And, just to pile on, I certainly remember billows of hot air about how universal banks, like J.P. Morgan, could never be managed tightly enough, or act with enough entrepreneurial elan, to rise above mediocrity. Now J.P. Morgan has crept past Goldman. Is the big bank, which has a few annoying scandals of its own right now (SIVs, Madoff, etc.), fated to remain the new Goldman because it had some league table success?
I would never bet against Goldman Sachs, if only because it remains a powerfully complex institution whose greatest assets, its workforce, remains. (I also wouldn't bet against a Charlie Sheen comeback simply on the faith that in America everyone comes back eventually.) It's also a firm that has shown remarkable ability to reshape itself quickly. A quarter, even a year or two, of softer earnings does not mean that the firm has lost its ability to mint money -- particularly since the ability of Washington to put the squeeze on a firm like Goldman seems far-fetched right now. And on this I agree with Davidoff: In the Wall Street we currently possess -- hell, in the global financial world -- reputation means less than in a distant past no one really wants to return to.