Introduction 1 Chapter 1: The Way Things Used to Work: Reputational Theory and Its Demise 7 Chapter 2: Thriving the New Way: With Little or No Reputation--The Goldman Sachs Story 29 Chapter 3: The Way Things Used to Be: When Reputation Was Critical to Survival 55 Chapter 4: Individual Reputation Unhinged from the Firm: Hardly Anybody Goes Down with the Ship 83 Chapter 5: Proof in the Pudding: Michael Milken, Junk Bonds, and the Decline of Drexel and Nobody Else 103 Chapter 6: The New, Post-Reputation Wall Street: Accounting Firms 123 Chapter 7: The New, Post-Reputation Wall Street: Law Firms 149 Chapter 8: The New, Post-Reputation Wall Street: Credit Rating Agencies 165 Chapter 9: The New, Post-Reputation Wall Street: Stock Exchanges 191 Chapter 10: The SEC and Reputation 215 Chapter 11: The SEC: Captured and Quite Happy About It 231 Chapter 12: Where We Are and Where We Are Headed: A Conclusion of Sorts 253 Index 277
For over a century law firms, investment banks, accounting firms, credit rating agencies and companies seeking regular access to U.S. capital markets made large investments in their reputations. They treated customers well and sometimes endured losses in transactions or business deals in order to sustain and nurture their reputations as faithful brokers and "gate-keepers." This has changed completely. The existing business model among leading participants in today's capital markets no longer treats customers as valued clients whose trust must be earned and nurtured, but as one-off "counter-parties" to whom no duties are owed and no loyalty is required. The rough and tumble norms of the market-place have replaced the long-standing reputational model in U.S. finance. This book describes the transformation in American finance from the old reputational model to the existing laissez faire model and argues that the change came as a result of three factors: (1) the growth of reliance on regulation rather than reputation as the primary mechanism for protecting customers and (2) the increasing complexity of regulation, which made technical expertise rather than reputation the primary criterion on which customers choose who to do business with in today's markets; and (3) the rise of the "cult of personality" on Wall Street, which has led to a secular demise in the relevance of companies' reputations and the concomitant rise of individual "rain-makers" reputation as the basis for premium pricing of financial services.
Jonathan R. Macey is Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale University and Professor in the Yale School of Management. He is a member of the Board of Directors of the Yale Law School Center for the Study of Corporate Governance, a member of the Faculty Advisory Group of Yale's Millstein Center for Corporate Governance and Performance, and Chairman of Yale's Advisory Committee on Investor Responsibility. He has served as an independent director of two public companies and is a member of FINRA's Economic Advisory Council and the Bipartisan Policy Center Task Force on Capital Markets. His many books include Corporate Governance: Promises Kept, Promises Broken and Macey on Corporation Law.