Wall Street didn't just lose hundreds of billions of dollars in the current financial crisis. It lost its good name, too.
It has long been viewed as the triple-A-rated center of the financial world, a trusted place to invest, and a role model for emerging financial centers around the globe.
But that was before Wall Street banks emerged as the central villains in the biggest financial crisis since the Great Depression. Before the exotic securities backed by risky mortgages that they created — and peddled around the world to investors — plunged sharply in value, causing economic mayhem. Before banks, insurers and mortgage companies started to fail at an alarming rate.
And, most important, before the Bush administration sought — and so far has failed to get — a $700 billion Wall Street bailout to avoid a 1930s-style economic collapse.
As a result, Wall Street's image has taken a major hit. People don't think as highly about Wall Street as they once did.
"People have long looked up to the U.S. financial system as a paragon of sophistication and efficiency, but now they realize that it is a false illusion," says Michael Panzner, author of Financial Armageddon and an upcoming book, When Giants Fall: An Economic Roadmap for the End of the American Era. "Wall Street as the center of finance is losing its place in the world."
Wall Street's reputation has suffered "a big black eye" that is not likely to fade from world view anytime soon, says Vanguard Group founder and ex-CEO John Bogle.
"This is a financial crisis brought on by Wall Street greed," says Bogle, who in November will release a book, Enough, which takes aim at Wall Street. "This has been the most speculative period in financial market history."
This isn't the first time in recent history that Wall Street, driven in large part by greed and multimillion-dollar paydays, has acted badly and put its reputation at risk. In the late 1990s analysts were slapping buy ratings on Internet stocks while badmouthing the companies in private. Earlier this decade, accountants and top executives at some Fortune 500 companies were caught cooking the books, and several mutual funds were caught profiting at the expense of their shareholders.
But the public relations fallout this time is far more serious: Wall Street's misdeeds have rocked the foundation of the U.S. and global financial system to its core. U.S. financial markets have been put on the brink of failure, shining an unflattering light on our free-market system. Fear of a systemic meltdown has wiped out $3.6 trillion in stock market value this year and knocked the Dow Jones industrials down 18.2%.
Customers leave when trust is lost
It's one thing to have tech stocks crash. Or put a crooked CEO behind bars for fraud. Or kick an unsavory analyst out of the business for hyping stocks. It's quite another to put the entire system at risk, says Axel Merk, president and portfolio manager at Merk Investments. "In the tech-stock bust, the system worked as it was designed," he says. "Checks and balances were in place. You had some business failures, but the financial system did not fail."