April 27, 2011
Denial Preserves Reputations on Wall Street
In May of last year, Goldman Sachs was under fire because of the bank's "dueling goals." The New York Times reported that no one had "accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against," but that potential conflicts of interest built into Wall Street’s business model were a significant part of related investigations at both the state and federal levels.
At the time, I wrote that "[j]ust like auto mechanics, restaurants, and other service industries, Goldman is in a market with significant competitors for clients. If most clients actually care about Goldman’s behavior (a point about which I am not entirely clear), Goldman will either have to convince them that they have changed or the clients will go somewhere else."
Steven Davidoff, the Deal Professor at the New York Times Dealbook, answers my question today about whether most clients care about the behavior of Goldman and other similarly situated companies. He says, quite simply: No. As he puts it: "Reputation is dead on Wall Street."
Apparently, Wall Street companies no longer face the same reputational concerns that auto mechanics, restaurants and other service providers face. Again, Davidoff explains:
Why does reputation no longer matter?
The reason is unfortunate and partly attributable to why we got into the financial crisis. People simply don’t matter as much on Wall Street as they used to. Instead size and technology carry the day.
The Deal Professor makes several compelling points, but I'm still not sure reputation doesn't matter. To keep with my auto mechanic example: it's not as though everyone loves auto mechanics and thinks they are all trustworthy. To the contrary, it's my sense that people often think their mechanic is trustworthy, but also think that many (if not most) are not. Perhaps that's true with Wall Street, too. It may be that most of the people who continue to do business with Goldman still think they are getting a honest deal, even if others are not.
After all, back in 2007, Kerry K. Killinger, former Washington Mutual CEO, said in an e-mail explaining why he didn't want to hire Goldman: “I don’t trust Goldy on this. They are smart, but this is swimming with the sharks.”
So maybe it is that reputation still matters. It's just that a huge group of high-powered executives are in serious denial that what they are hearing about their investment bank is true.