« The subprime mess and securitization | Main | Snippets on the role of patents »
October 23, 2007
Does reputation matter?
Apparently, the intangible of reputation is not as important as we might have thought on Wall Street. From Dennis K. Berman’s column in today’s Wall Street Journal - Stakes Change Rules on Value Of Reputation:
But it turns out that there are natural limits on how reputation -- the esteem with which one is held by others -- can affect behavior. We're seeing those limits now, as the world's credit crisis plays out before our eyes.
"Reputation matters until you get to some serious pain," says Edward Rock, co-director at the Institute of Law & Economics at the University of Pennsylvania. "It matters if the stakes are low. Somewhere between $25 million and $1 billion, it shifts."
How else to explain how banks, private-equity firms, bond salesmen, boards of directors, and hedge funds are wheedling, reneging on and resetting all sorts of business contracts and promises.
"I would love to say yes, that reputation matters," said one top deal maker on Friday. "In principle it does. Still, the line is not as bright as that implies." Indeed, the breadth of this current crisis has created what might best be described as a reputational free-fire zone.
. . .
"People can plead that 'I'm not a bad actor. I haven't broken my word if everyone else is doing it,' " says Lisa Bernstein, a legal scholar at the University of Chicago who has studied the role of reputation among tight communities such as cotton and diamond traders. "It's going to give quite a bit of cover."
Ms. Bernstein has found that reputation-enforced business networks work best among tight-knit groups. Once these networks expand, business people are forced to rely on formal legal contracts. The irony is that these contracts -- hundreds of pages thick -- are often no more effective than simple informal agreements based, essentially, on reputation.
That's reflected in the larger structural changes on Wall Street. In 1907, it was J.P. Morgan himself who helped calm a dangerous credit crisis, putting his good name behind a rescue plan. Today, J.P. Morgan Chase & Co. is an immense and largely faceless institution of 180,000 people, full of committees and project teams. Its reputation is harder to pin down because it's difficult to assign responsibility in the first place.
It's also easier to engage in reputation-damaging behavior if there are few competitors looking to take away business. By all indications, it would be very hard for both corporations and private-equity firms to lock out J.P. Morgan and Bank of America because they balked at funding the $25 billion acquisition of student lender Sallie Mae. The two banks simply have too much sway in the market.
In other words, when money talks, reputation walks. At least on Wall Street.
Posted by Ken Jarboe at October 23, 2007 9:38 AM
Trackback Pings
TrackBack URL for this entry:
http://www.athenaalliance.org/mt/mt-tb.cgi/1623