January 20, 2010

What's Truth Got to do With It?

In my last column I offered a snapshot of research depicting the sorry state of consumer trust in Wall Street and Washington. As Wall Street banks announce their 2009 bonus plans, estimated by to be $145 billion, what better time is there to discuss whether Wall Street firms can win back the trust of investors?

Can Wall Street win back investors? Some industry veterans are skeptical. Citigroup's former chief, John S. Reed, was quoted in The New York Times on January 10, saying: "There is nothing I have seen that gives me the slightest feeling that these people have learned anything from the crisis...they just don't get it. They are off in a different world." To put a finer point on it, Independent Community Bankers of America President and CEO, Camden Fine, told Politico, "It's greed, not humility, that drives Wall Street... Memories are short so they move on quickly from a crisis."

What does trust mean to Main Street? The CBS News icon, Walter Cronkite, had it. He was "the most trusted man in America," during turbulent years which included the assassination of President Kennedy, Vietnam and Watergate. His fidelity to the "facts" and "objectivity" was his trademark. Where do consumers place their trust, today, beyond family and friends? As an institution, the military ranks at the top, while Consumer Reports has been viewed as the most trusted organization in Washington D.C., and nurses are believed to be the most honest and ethical among professionals.

And what does a lack of trust mean? It comes down to having little or no confidence in, or not be willing to rely on, an individual, organization or institution. Researchers Paola Sapienza and Luigi Zingales, keepers of the Chicago Booth/Kellogg School Financial Trust Index, affirm how key trust is to investor behavior. Their work is intriguing. Early last year, in reviewing their initial survey, the researchers noted, in particular, why a 'trust gap' should concern us: "Differing levels of trust in brokers and the market influenced plans to increase or decrease investment over the next few months."

Health Care--Did the president tell the truth ? Washington scrapes are not known to inspire trust, but often the president stays above the fray. Not so with his health care legislation. Last November, one of Washington's insider 'elders,' Washington Post columnist David Broder, wrote an Op-Ed piece, "A budget-buster in the making," ostensibly about President Obama's health care reform legislation and fiscal responsibility.

In fact, Broder really wrote about trust, and how to lose it. He pointed out the credibility challenge the administration faced, because: 1) the president repeatedly promised his health care legislation will not add to the federal deficit, and 2) no one, it seemed, believed he was telling the truth.

Broder said, "every expert" he spoke to agrees the legislation is a "budget buster." He also cited a Quinnipiac poll that found only 19% of respondents believed the president "will be able to keep his word," on health care reform and the budget deficit. Further, 51% of respondents opposed the health care legislation, with only 35% supporting it.

Broder did not explicitly say 'the president lied,' about a core element of the legislation. But in illuminating the discrepancy between what the president said was true and what independent experts that Broder trusted attested to--and the public believed to be true--Broder implicitly said so. In effect, he has established the "Broder Standard" and made clear that the president came up short.

This seemingly unremarkable event is actually important for two reasons. First, it was a confession without meaning. In the hyper-partisan environment that is Washington, this sympathetic (to the president), Democratic-leaning and respected pundit essentially confessed the president did not tell the truth about a material fact about the health care bill, and those in charge in Washington shrugged. Broder spoke intelligently about the president making an incredible claim about the health care legislation, his legislation. This was a claim essential to attaining public approval, and, Broder suggested, no experts outside the administration and few Americans believed it was true. Still, those running Washington merely shrugged.

Second, as an example of 'how Washington works,' Wall Street executives took this example as a 'pass' and appeared to learn the wrong lesson. They learned they could be cynical. They learned that politicians' lectures on greed and bonuses should not be taken seriously, because Washington is no better. After all, when the president, himself, hitches his priority legislation--legislation that will restructure one-sixth of the economy--to a core premise that, outside the administration, is believed to be emphatically untrue, he sets the 'tone from the top' and the standard for what's okay. Perhaps even suitable. In so doing, his moral outrage at "fat cat bankers" that fuels charges of Wall Street "greed" loses some of its swagger.

This violation of the Broder Standard explains a lot of the public's disapproval of the administration's health care reform, and how public trust in this legislation was lost. Wall Street's mistake, so far, is to appear to look to Washington for guidance in winning back investors.

The magnitude of this mistake is evident in the tsunami that is sweeping the Massachusetts senate race. Even if the Democratic candidate prevails in the January 19th election (which now appears to be a dead heat), the message should still be clear. While those in power in Washington shrug off this 'discrepancy,' voters do not. If nothing else results from Tuesday's Massachusetts election, maybe Wall Street will roll out Plan B to win back investors.

Knut A. Rostad (kar@rpjadvisors.com) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia, and chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.

Read more of Knut Rostad's Regulatory Reason blog posts:

What's Truth Got to do With It? January 18, 2010 As Wall Street banks announce their 2009 bonus plans, estimated by WSJ to be $145 billion, what better time is there to discuss whether Wall Street firms can win back the trust of investors?...
The Return of Investor Confidence? In 2010? December 29, 2009 A snapshot of consumer attitudes right now is not a pretty picture and suggests there is a long road to travel before investor confidence returns. ...
Partisanship on Steroids December 14, 2009 Passage of the financial reform legislation in the House is historic and important. It may also be, unfortunately, short-lived in the current, toxic partisan environment. ...
Peter Drucker for Wall Street Czar November 24, 2009 Drucker would advise Wall Street to ask what retail brokers think. About being a fiduciary, brokers might "surprise" execs. Many would say "Bring it on!"...
Too Rich or Too Thin? November 03, 2009 You can never be too rich or too thin: Can we disclose ourselves out of obesity? Can disclosures replace fiduciary duty?...
A Tail is Not a Leg October 16, 2009 As the rhetoric heats up over regulatory reform one is reminded how much political life has not changed all that much since Abraham Lincoln was quoted noting the following: "How many legs does a dog have if you call the tail a leg? Four..." ...
SEC Chairman Speaking the Fiduciary Language September 28, 2009 SEC Chairman Mary L. Schapiro's September 24th speech, before the Financial Services Roundtable, included her most recent public remarks on the fiduciary standard. The Chairman's remarks are important. ...
Rakoff's Bank of America Opinion: "The Tipping Point" September 16, 2009 In September 2013 when we look back on Lehman Bothers' demise, will we also see a "reformed" financial system and regulatory structure? One that may be hard to recognize compared to today's structure? If "yes," look to Judge Jed S. Rakoff's opinion. ...
Listen to Chuck August 31, 2009 When Chuck Schwab talks do people listen? They ought to--even when he is off base, as he was in an August 19 opinion piece, "Brokers Aren't Responsible for Bad Bets," in The Wall Street Journal....
Disclosures and Evoking the Lewis Liman Defense August 14, 2009 Why did the SEC accept a $33 million settlement in light of its allegations that Bank of America failed to disclose that bonus payments were authorized for up to $5.8 billion? Judge Jed Rakoff wants to know. ...
The Authentic Fiduciary Standard--What's the Fuss About? August 11, 2009 Recent discussion in some quarters has focused on the "similarities" between the fiduciary and "arm's length" standards. The clear implication appears to be: What's all the fuss about whether investors retain fiduciary advisors or not? ...
Blog: Talking the "Fiduciary Talk" in Washington July 07, 2009 The Obama Administration proposes that brokers giving investment advice should meet a fiduciary standard. SEC Chairman Mary Schapiro states strong support for a fiduciary standard. How will this translate into legislation?...
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