Remember the financial crisis? Remember the wirehouse research scandal? Remember the options-backdating scandal?
Critics of Dodd-Frank or Sarbanes-Oxley conveniently forget that bad actors have run rampant on Wall Street for a long time. That’s why we need regulation and legislation, neither of which is ever perfect. But an interesting analysis of why wrongdoing happens on Wall Street concerns the ownership model of the big firms.
Once upon a time (before 1970, when the NYSE no longer required members to be partnerships), the big brokerage firms cum investment banks were partnerships, where risk-taking was treated differently because the money in those big firms belonged to partners, not end clients. When the partnerships became public companies, the executives at those companies were removed from the concept that they were risking their own money.
I don’t remember where and from whom I first heard that partial explanation for the financial crisis of 2008-2009, though the report from the bipartisan Financial Crisis Inquiry Commission cited that ownership model change as one of the underlying causes of the crisis in its 2011 report. “The very nature of many Wall Street firms changed,” the report noted, “from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks.”
Along with the change in ownership came a big change in compensation for the machers of Wall Street. “When the investment banks went public in the 1980s and 1990s, the close relationship between bankers’ decisions and their compensation broke down. They were now trading with shareholders’ money.” (The report remains good reading; just Google GPO and FCIC to find it.)