World - The masters lost our trust

Aline van Duyn

Sherman McCoy, the fictional 1980s "Master of the Universe" Wall Street bond trader, had his sights set on a deal which could earn him $1.7m in commission payments, money he needs to pay off the mortgage on a lavish Park Avenue apartment.

"The only real problem was the complexity of the whole thing," readers of Tom Wolfe's "The Bonfire of the Vanities" are told.

Yet, by today's standards, the deal in question appears rather straightforward.

When novels are written about the modern-day Masters of the Universe - Wall Street's hedge funds and structured finance gurus - the big financial plays that shape the dramas will be collateralised debt obligations, or perhaps credit default swaps on collateralised debt obligations.

Two interesting lessons emerge from a look back to the 1980s excesses as recounted through the tale of Mr McCoy's rise and fall. He said that having a track record was essential to win investor trust.

Whereas in recent years confidence in bankers with track records has been replaced by confidence in credit ratings. The unquestioning faith in the bullet-proof status of a triple A credit rating led to the buying of billions, not just millions, of structured bonds that are now worth little or nothing.

The credibility of ratings has been questioned by both insiders and outsiders. Yet the poor service the rating agencies gave many of their structured finance customers has also left a stain on the bankers who touted the products. For many, Wall Street and the rating agencies are inextricably linked.

Second, fictional bond traders like Mr McCoy made a huge effort to insulate themselves from the gruff realities of New York life in the 1980s, refusing, for example, to ever ride the subway.

The two points are related. The general public's confidence in Wall Street is worse than ever, yet Wall Street still does not understand how it is perceived.

"Our industry's image is at an all-time low," said Blythe Masters, a senior executive at JP Morgan Chase who has played an important role in the development of credit derivatives in the last decade. Speaking at a conference this week, she said some on Wall Street would "bristle" at the thought of taking blame for the current crisis, but that doing so was essential. She is absolutely right.

But the divide between Wall Street and the rest of the country remains

wide. Many financiers have lost their jobs or large parts of their wealth due to share price collapses - this week alone I have met with two contacts who are no longer employed. But there are concerns about the wealth that those still employed are still enjoying.

The focus now has become the nine US banks which are receiving $125bn of public money. They have spent or reserved $108bn for employee pay and bonuses in the first nine months of 2008, nearly the same as last year. Henry Waxman, chairman of the House of Representatives oversight committee, has rightly asked them to explain this and has questioned the "appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record". This issue is the one that people not working on Wall Street talk about the most - I have had discussions about it at the school gate and in practically every social encounter.

For Wall Street to really restore the confidence, it needs to understand why its pay make others not just bristle, but angry. Getting paid as much as last year looks really bad, it is as simple as that. Indeed, with such a large amount of their expenses eaten up by compensation costs, curbing payouts last year and the year before would have presumably left the banks is a less dire financial condition than they are now.

The story of Sherman McCoy ends in utter disaster, the dire consequence of his initial decision to avoid assuming responsibility for a crime. Behaving as if it's business as usual when it clearly is not can have devastating effects

aline.vanduyn@ft.com