Wall Street is finding that there is no quick fix when it comes to winning back public confidence. Suzanne Miller reports from New York on leading banks' attempts at restoring investor faith

The year was 1907, the place was Wall Street and the man of the hour was J Pierpont Morgan, the banking legend known as "The Organizer" who that year single-handedly pulled the US financial system from the brink of insolvency and helped channel cash to a desperate New York Stock Exchange. Mr Morgan's actions worked like an elixir: he demonstrated he had faith in the market and that the public should too. And so they did.

Fast-forward to December 20, 2002. The place again is Wall Street and the public's confidence is once again in shambles. But this time the man of the hour does not hail from the ranks of Wall Street. This time it is the New York Attorney General, Elliot Spitzer - the man nicknamed "The Enforcer." That day in December, 10 securities firms agreed to pay $1.4bn in penalties and fees to settle charges that Wall Street's best and brightest had sold investors a bill of goods through misleading research. Wall Street's reputation had also taken a tenebrous turn over the IPO spinning scandal and the televised spectacle of senior bankers grilled by Congress over their role in the collapse of Enron. Consider, too, how the stock market has knocked the stuffing out of American investors and it is easy to see why confidence is in the dumpster.

"Two years ago you would have been master of the universe, proud to say you were an investment banker. Now people snigger when they hear what you do," says Alan Johnson, a New York-based Wall Street market veteran who is a compensation consultant for the industry. These are hard days for the banking profession, and not just because core business is nugatory and bonuses have shrunk as much as 70%. Investors are deeply disillusioned with their change in fortune and the role banks have had - however misplaced some of this blame has been. Now the swagger and panache are gone and bankers are fodder for the gossip sheets.

Leading banks are quietly hatching plans to restore public trust. So far most are working to get their houses in order - deploying risk management tools that will help prevent the worst of last year's balance sheet blow-ups from happening again.

Senior bankers acknowledge, privately, that they will also have to rebuild morale from within. "This is an absolutely critical issue for senior management to focus on because each of us has to go out and regain the trust of the investor," one executive says. "Most of this will happen after the global settlement is inked, so people are loath to say anything definite right now about the steps they will take."

Blast to the past

Robert Dilenschneider, a public relations and crisis consultant for Fortune 500 companies, says Wall Street could sorely use the help of banking legends that molded their banks in the 1970s and 1980s. "We need the same type of quality and determination that the former bankers of the financial services and banking industries instilled in the marketplace and with their employees. People like John Weinberg at Goldman Sachs, S Parker Gilbert at Morgan Stanley, Dan Tully at Merrill and Jack Hennessy at CS First Boston, made a difference."

It is easy to understand why pundits now pine for times when strong leaders presided as heads of large prosperous households – chieftains who could instill confidence and a sense of pride among those who worked under them. That is pretty hard to emulate now in an industry dominated by large, transient communities of bankers that populate sprawling global franchises. And this makes large-scale change – and the restoration of morale within banks as well as the marketplace – all the more painstaking to effect.

Proactive approach

In the meantime, industry groups like the Securities Industry Association (SIA) - a group comprising 600 securities firms including investment banks and broker-dealers - are conducting public drives to restore confidence. Marc Lackritz, president of the SIA, says the organisation is sponsoring seminars and courses for bankers that address ethics and conflicts of interest. The SIA is also working directly with the public, posting websites like siainvestor.org, which has been averaging 25,000 hits a day. The website aims to give the public a primer on investment – the best of class, asset allocation and so forth. There is a section for widows, young people starting out and tips on saving for retirement. The SIA has also issued pamphlets and brochures suggesting what to ask a broker when opening a new account. There is even a primer for understanding the mechanics of an IPO and how book-building works.

It is hard to imagine the average American caring much about salutary economic lessons when all they want is their savings back. On the other hand, the SIA is right to promote investment education for a public that has been rudderless too long – a factor that has fuelled so much anger and misunderstanding over what went wrong.

Playing the ethics card

Mr Lackritz also believes there's potential for the banking industry to rise anew from the scandals of last year through old-fashioned competition – using best-of-class ethics as their calling card. "There's a huge amount of competition among the firms about integrity and quality of service. Everyone's trying to differentiate themselves and that's a very positive thing," the SIA president says. He hopes this will encourage "every individual in this business to conduct themselves as though their name were on the door."

Most of those vying to distinguish themselves are doing so discretely. Wall Street banks were required to send e-mails to the Attorney General's office after Mr Spitzer found incriminating e-mails among those of Merrill Lynch over a year ago. One investment banking executive involved in the recent global settlement puts it this way: "We sent some 300,000 e-mails [to the Attorney General's office] and none says 'this is a pig, buy it'. But how do you communicate that in a way that resonates with your clients? Points will have to be made one client at a time."

Right now banks are saddled with the thankless job of writing to their investors and letting them know what happened in the settlement as tactfully as possible. The wording in these letters has hung on the size of the fine that offending banks were hit with. For the likes of Morgan Stanley, this part of the investor outreach campaign has probably felt a tad less painful, considering it got hit with the smallest punitive damage of $50m. The fine looks like peanuts next to Salmon Smith Barney's $325m. "We are also pleased that we have been differentiated from our competitors in terms of the retrospective amounts we will pay," reads the two-page letter one investor received.

This may be a cheerless marketing ploy, but it shows how little the banks have to work with as they woo back investors. It is pointless, most concur, to launch a splashy marketing offensive. And anyway, if Wall Street were going to do that it probably would have done so when Charles Schwab, the retail broker, launched its own opportunistic campaign this summer to win disaffected investors. In one TV ad, a broker at an unnamed firm exhorts his minions to flog a dud stock with the rallying cry: "Let's put some lipstick on this pig!" While bankers up and down Wall Street grimaced, most knew it was pointless to retort with an ad protesting: "Hey, we're NOT selling pigs!"

"Only time and proper conduct will heal," says money manager Michael Holland. But he rightly cautions, too, that Wall Street ethics is just one of several issues that have crushed investor morale. In truth, many investors would find it easier to forgive and forget if Wall Street chalked up another bull market. But the securities industry, which last year suffered its worst performance since 1995, has left the average American stock investor to look for succour where he can. In numerous cases, that has been in court. In mid-January, one law firm filed some 100 arbitration claims on behalf of investors against Citigroup Inc's Salomon Smith Barney and its former star telecom-stock analyst Jack Grubman over the research advice they got on WorldCom Inc. Many more could follow.

The danger of denial

Samuel Hayes, the Jacob H Schiff Professor of Investment Banking Emeritus at Harvard Business School, exhorts banks to be more aggressive in communicating the changes they have made over the past months to the broader public. "If they were smart they would launch a real public relations campaign to articulate the changes they've made," he says. While he gives Wall Street a grade of seven out of 10 for changes already made – improving research independence, for instance – he worries that some are sending the wrong signal to the marketplace.

"My impression is that various firms have taken the internal position that they've been treated unfairly by overzealous regulators and that this has created an internal sense of indignation about their culpability. They're absolutely wrong in doing that," he says, "because it's creating an atmosphere of denial."

Frank Barkocy, director of research at Keefe Managers, a hedge fund that invests in financial services stocks, says banks should: "Read the writing on the wall that investors will no longer tolerate the sins of the past." He argues that banks still need to articulate "a clear cut programme from top management" explaining how they are going to do business. "Leave no stone unturned – make sure everyone is fully cognisant of the new plan and adheres to it. Mandate seminars so nobody can say they weren't aware of the changes – and take swift action against those who violate the rules," he advises.

Integrity in earnest

The single greatest fear among industry observers is that banks will pay lip service to the most vociferous critics but will not really change. That is why some are suggesting draconian steps that will show everyone is in earnest. Another Wall Street banker involved in the settlement talks says firms should purge their ranks of anyone who has been seen to cross the integrity line – especially those associated with IPO spinning and research scandals. "There needs to be a public pillorying of the worst offenders, which is why Jack Grubman had to go," says the banker who asked not to named.

But it is unlikely banks will willingly sacrifice their own. That might mean more ugly headlines and dirt-digging – the kind dished out when the e-mails of Salomon Smith Barney's telecommunications star Mr Grubman were aired in the press. The allegations ultimately came to naught, but the press had a field day while Mr Spitzer investigated.

This is not the first time concerns about conflicts of interest have been broached. In 1972 Arthur Levitt, the-then future Securities and Exchange Commission (SEC) chairman – delivered a biting speech at Columbia University when he was in charge of retail at Shearson Hayden Stone. In his new book, Take on the Street, he recalls what he said: "How can a broker view himself as a professional – as a counsellor who considers his client's interest before his own – when his livelihood is dependent upon taking an action which may not be appropriate or timely to take?" He called on the industry to develop a way to pay brokers on how well their clients' investments performed rather than on the volume of transactions. Colleagues derided him as naïve and ultimately, Mr Levitt retired from the SEC with a mottled legacy for instituting changes he so advocated for investors.

Now the SEC is once again up to bat for investors under the new leadership of Wall Street veteran Bill Donaldson. As the industry begins a new chapter, most would do well to recall the words of J Pierpont Morgan, who testified in 1912 that character was the key quality to success, "...before money or anything else. Money cannot buy it...Because a man I do not trust could not get money from me on all the bonds in Christendom." Few men were richer, and even fewer gave such lucrative advice for free.


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