Sydney Finkelstein, a professor of management at the Tuck School of Business at Dartmouth College, says the shocking failure of once-vaunted investment banks Bear Stearns and Lehman Bros. shows just how important reputation, image and confidence is to the healthy functioning of financial markets. Both firms were undone by customers who stopped doing business with them after losing faith in the firms' ability to make good on trades and debts.
"What are these companies? Their assets are their people, reputation and expertise. And these are not things you can sell in times of trouble," Finkelstein says.
Finkelstein thinks the current mess tops all other Wall Street crises of recent vintage, including the dot-com meltdown and the savings-and-loan crisis of the late 1980s. The reason: Wall Street's massive losing trade on real estate loans has created a level of uncertainty and economic instability that is unparalleled in modern financial history. It also put Main Street at risk.
"Nobody expected it, and nobody knows what is going to happen next," Finkelstein says.
When controlled, greed is good
Main Street investors are livid with Wall Street for putting their financial lives in peril.
"Wall Street knew what the risk was but did not care," says Lindsey McMahon, a Florida-based real estate agent. "I have lost faith. We need to take the bull by the horns and fix the situation, fire all the people in position of authority, eliminate golden handshakes. It will take a lot of real work to earn back respect."
Adds Matt Korol, a 53-year-old information technology manager from Seattle: "The financial system is more closely related to a Ponzi scheme than to something that is inherently trustworthy. Greed is ultimately what makes markets work. We can't legislate greed out of existence, but we can put appropriate controls in place to make sure that markets do not get too skewed by the excesses."
But Wall Street isn't the only villain, says former Securities and Exchange Commission chairman Arthur Levitt. Regulators, lawmakers, the Federal Reserve and the Treasury Department all share blame for not keeping a closer eye on banks and brokerages and for allowing the proliferation of opaque and complex credit instruments brandishing exotic acronyms like CDOs, CMOs and CDSs.
"Our system has been badly regulated and poorly overseen," Levitt says. "The U.S. regulatory system has got to change dramatically. People tend to fear what they don't understand and what is hidden from them, and a vast portion of the market is totally hidden from public investors. We have to know what the derivatives markets are doing, who owns what positions, what the hedge funds are doing."
Wall Street's global standing suffers
A big repercussion of Wall Street's fall from grace is its tainted prestige with foreign investors. Foreigners who once looked up to Wall Street and mimicked its investment principles and techniques now question whether that is a wise approach, says Sung Won Sohn, an economics professor at California State University. "Now they are saying, 'What can we do different? We don't want to be another Wall Street.' "
Many think Wall Street has lost the power and prestige it used to command. "It is going to be many years before international investors regain their confidence in Wall Street," Sohn says.