Jonathan Macey's <i>The Death of Corporate Reputation</i>

There is much more to be done before we can get a sense of what really happened to the power of reputation on Wall Street.
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Jonathan Macey tries to bag one of the big themes of latter-day, post-crisis Wall Street in "The Death of Corporate Reputation: How Integrity has Been Destroyed on Wall Street", but his quarry escapes. The relationship of reputation to trust, and trust to the functioning of capitalist markets and commercial societies, is a subject worthy of the great Scottish moral philosophers, including Adam Smith. It is, in so many ways, one of those subjects that shape, or destroy, societies. And the state of reputation tells us much about how we view ourselves, and each other, and how we interact with our political, financial and regulatory systems. Without reputation, without the trust that stems from a viable -- as Macey, a Yale Law School professor, calls it -- "theory of reputation," we are all perilously close to a Hobbesian landscape where only might make right.

That reputation has come to a low point on Wall Street is inarguable, though whether it has died, as Macey's title declares, is a stretch. Death and destruction, of course, imply there's no coming back, in which case why write this book at all? It also implicitly argues for that necessary condition of the jeremiad: the belief that the world was once different, better, more upstanding, more sensitive to reputation; as he calls one chapter, "The Way Things Used to Be: When Reputation was Critical to Survival." In fact, that argument lies at the heart of Macey's theory of reputation. But whether it is true or not, and true to what extent, he never quite nails. Instead, in a series of chapters marching through recent events and bolstered by secondary sources, he piles up ever-more evidence of reputation's downfall.

There is a lot of it, much of it damning. Wall Street has clearly traded its reputation for profits in a variety of cases, from Michael Milken in the '80s to Bankers Trust in the '90s to the tangle of reputation-destroying episodes -- some larger and more damaging than others -- more recently. He rehashes Goldman Sachs & Co.'s various reputational woes, flies by Enron and Salomon Brothers, and pummels those supposed guardians of reputation: the credit rating agencies, accountants, lawyers, stock exchanges, regulators, mostly the Securities and Exchange Commission.

Who can argue with this? What one really wants to know, however, is why has all this befallen us? And when? On that Macey is on shakier ground. He offers up both his traditional theory of reputation and the economic model of reputation. These are somehow connected. The traditional theory involves the notion that, particularly in finance, reputation is everything. Lose it, damage it, and you shed customers and clients. Traditional reputational demise, moreover, destroys not just firms but all parties associated with firms. You are shamed into exile. The economic model is a kind of rational, cost-benefit analysis. Firms, he writes, "will not invest in developing reputations for honesty and trustworthiness unless the benefits from making such investments are greater than the costs." Regulation, and other reputation-enhancing institutions, can aid firms with good reputations by chasing after those with bad. Macey argues that we have lost the shaming, the guardians, and the belief in crime and punishment. And the media that amplifies reputational sins has lost credibility and been coopted, distracted, frightened or simply uninterested.

That theory and model are perfectly good places to start but a very unsatisfying way to end. Once stated, Macey accepts the economic model as revealed truth, arguing that it explains the fact that Goldman has never been "punished" for its transgressions -- punishment in his terms meaning to be shut down, its malefactors jailed or fined and everyone associated with it somehow shunned; Macey is not interested in more subtle manifestations of reputational decline. Macey also spends very little time investigating deeper changes that have eroded even the common belief that reputation matters: The evolution of Wall Street firms from agent to principal (and the mixing of the two); the increasing complexity of these firms; the growing transactional ethos anchored in belief in efficient markets, deregulation and the powers of quantitation. In fact, some of these are the very elements Macey has posited in earlier articles and books -- notably 2008's "Corporate Governance: Promises Kept, Promises Broken" -- as solutions to governance woes of U.S. public companies: more market-oriented solutions like M&A and activist investors.

Moreover, Macey's "theory of reputation" is just that, a theory, and not necessarily historical reality. His historical evidence here gets confused. He presents Bankers Trust's derivatives scandals in the '90s as "the way things used to be." That is, the bank sullied its rep and nearly collapsed before it was acquired by Deutsche Bank. Somehow this is presented as different from the fall of Drexel in the late '80s. That difference? Drexel exiles, he argues, including Milken (who did go to jail, though Macey doesn't think he deserved to), got to keep their fortunes and mostly move on and build new careers. This is true, though the sequence is confusing. He denies it, but BT veterans similarly diffused throughout finance. In fact, one of BT's brightest stars, Allen Wheat, went on to run Credit Suisse First Boston. And Salomon after its fall sent John Gutfreund into sullen exile, but gave the world John Meriwether (and Long-term Capital) and Michael Bloomberg.

Moreover, Wall Street history is replete with examples of reputationally challenged firms and principals who held onto their jobs and fortunes. The old House of Morgan was excoriated in a number of damaging investigations, from the Pujo Committee before World War I to the Pecora hearings during the Great Depression. Both J.P. Morgan and his son suffered from, but survived, those episodes. Pecora unveiled damaging facts about a number of Wall Street firms and banks. Albert Wiggin, chairman of Chase National Bank, was caught shorting Chase stock as he oversaw his bank's attempt to buy into the crash. His reputation suffered but the bank - and his fortune - survived; he retired, advised the Hoover administration, bought art and contributed to philanthropies. In fact, Macey's "theory of reputation" may be an artifact of the post-Depression era of stiflingly tight bank regulation, when Wall Street consisted of partnerships, and when market volumes, particularly in equities, were meager. In such a controlled environment (and controlled means not just lots of rules but strict gatekeeping by ethnicity and gender and fixed profits), "reputation," however defined, did matter.

There is a final aspect of "The Death of Corporate Reputation" that is off-putting. Macey's earlier work, notably "Corporate Governance," are tightly argued and tightly written. This is neither. I'm not sure who the FT Press, the publisher, expected to read this, but every chapter has an italicized "executive summary" at the beginning and an italicized conclusion at the end. The copy editing is loose and some of the chapters feel like monographs shoved together. Macey also has a tendency here -- not evident in his earlier work -- for adjectival excess: the "influential Economist," the "highly successful Apollo Management Company" (meaning, I assume, Leon Black's Apollo Global Management), the "infamous Michael Milken." It feels tossed together, like a salad; it's not a boon to publishing's reputation.

Still, it's an important subject, and Macey at least makes an attempt to take its measure. He does have interesting things to say about the corrosive relationship between regulation and reputation, the vital role reputation plays in finance and the problem with using group stereotypes as a substitute for reputation in "post-reputational capital markets." But there is much more to be done before we can get a sense of what really happened to the power of reputation on Wall Street.

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