Why did the financial scandals really happen? Why are they
continuing to happen? In The Death of Corporate Reputation,
Yale's Jonathan Macey reveals the real, non-intuitive reason, and
offers a new path forward. 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 inAmerican financefrom the old reputational model to the existing laissez faire model and argues that the change came as a result of threefactors: (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.This compelling book will drive the debate about the financial crisis and financial regulation for years to come--both inside and outside the industry.