On Wall Street, Bigger Means Worse

Published: Apr 27, 2011

Topics: Finance  

At least in the reputation department it does.

In a recent DealBook post, Stephen M. Davidoff writes, "Reputation is dead on Wall Street," pointing out that as investment banks have grown, their reputations have shrunk.

Of course, since the recent financial crisis, which big investment banks played more than a small part in causing, their reputations have hit all-time lows, especially since no banker has taken blame for the downturn, and executives who led the big banks (and us) into the crisis have not been reprimanded, and, in fact, in many cases, have received the exact opposite: bigger paychecks and new jobs.

But Davidoff suggests that the reputational problem occurred even before the crisis, explaining that Wall Street banks' focus on getting larger and on trading (both of which led straight to the crisis) was the U-turn. He writes:

Morgan Stanley, for example, had only 31 partners in 1970 and fewer than 1,000 employees. But this began to change in the 1980s. Trading markets became much more sophisticated, and trading and brokerage became the investment banks’ primary business. This is a technology game. The better the technology, the better the trading and brokerage operation. Individuals became less important. The growth of more complex capital markets and a global economy also created much larger financial institutions. Morgan Stanley now has more than 62,000 employees.

That is, the individual banker, who used to rely on his word and reputation to bring in clients and thus bring in revenue and profits, is no longer all that important. Instead, the traders and wealth managers and tech gurus who create complex models upon which to trade have taken the place of the relationship investment banker. And so this is how Wall Street works, according to Davidoff:

A client now trades or does business with a bank based on its positions or ability to make a market or loan. The executive at the bank executing the transaction is unimportant.

Which is simplistic, but true.

One aspect in banks' histories playing a major part in this reputational shift that Davidoff doesn't mention directly, although he alludes to it, is the fact that big banks are no longer private partnerships but public companies, meaning they're at the mercy of shareholders, who demand significant growth.

For example, Morgan Stanley's IPO occurred in 1986, during the time Davidoff describes above. Goldman Sachs, though, held out for another decade, and only lost its reputation in 1999 (when it went public). Prior to that date, Goldman held a mystique and reputation that was unparalleled not just in banking but perhaps across the entire financial services sector.

More recently, Lazard became the last of the big blue-blooded investment banking partnerships to go public, marrying its fate to shareholders in 2005. And today, even the smaller investment banks are public companies. Evercore, Greenhill, Gleacher and others are all publicly-traded firms, meaning they need to keep growing at all and any costs or else risk closing shop.

Though, it should be pointed out that the Lazards and Evercores and Greenhills of the world are very different than the Morgan Stanleys and Goldmans (and J.P. Morgans and Citis and BofAs) in that these smaller banks don't operate sales and trading units. Instead, they primarily rely on their relationships and deal-making prowess in M&A and the IPO and debt underwriting space.

Which is why, for the most part, these firms stayed in the clear in the reputation department when the mortage-backed securities hit the fan.

As Wall Street Firms Grow, Their Reputations Are Dying (DealBook)


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