Jack Bennett Shakes Up Wall Street

When I joined Exxon in June 1972, I walked into a brand new building, 1251 Avenue of the Americas in Manhattan. That this building still housed Exxon’s headquarters said a lot about the financial world at that time. There were reports that Exxon was leaving the city. It was inconvenient and expensive. A story later circulated that Exxon’s CEO went into a meeting with David Rockefeller thinking he was taking the company to New Jersey, and walked out with a new building in Rockefeller Center. Even more telling, Exxon’s principal tenant was also its primary investment bank. Morgan Stanley & Co. leased floors 28–36. These results were not a coincidence. Chase and Morgan Stanley were known to be Exxon’s closest banking relationships. It was a time when bankers had the ear of company directors, and when exchanging favors was part of making sure credit would be there when needed.

In June 1973 I transferred to the Corporate Finance Division. Wanting to learn as much finance as possible, I visited the file drawers after hours. To my amazement, they were stuffed with Morgan Stanley (MS&Co.) studies. These were not the “pitch” books that would clutter up file cabinets later on. These were serious studies of textbook issues: capital structure, dividend policy, lease vs. buy and the requirements for maintaining Exxon’s AAA rating. All apparently were undertaken by MS&Co. for free. This work came along with the relationship.

I quickly learned that Morgan Stanley was Exxon’s “house investment bank.” This meant it would be lead underwriter and book runner for all Exxon capital market transactions. This was lucrative and not especially risky business. It also involved immense prestige. MS&Co. enjoyed an enviable list of clients, including GM, GE, SoCal, Mobil, DuPont, and IBM. Serving these clients meant servicing all of their needs. These included merger negotiations, corporate restructuring and issuing equity. Free studies were part of this relationship.

Several conditions quietly fostered “relationship banking.” Modern corporate finance was still emerging in 1973. Exxon only adopted Net Present Value for capital budgeting in the mid-1960s, and it was an early adopter among corporations. New theories were emerging from leading business schools. Firms like MS&Co. hired the best and brightest from those schools; this earned them a reputation as a repository of new theory expertise. Exxon’s CFO was an international economist who had helped design the post-war monetary system. However, he probably couldn’t tell you that Miller and Modigliani were capital market theorists. Exxon’s CFO was happy to have MS&Co.’s help when advising his board on keeping the AAA.

The generation then running Exxon also had vivid memories of credit rationing. These men had seen banks fail and the government swallow up all available credit during a war. They had witnessed a European banking system so broken that it could not finance reconstruction. To them it made sense to keep your banking friends close. To that end Exxon not only gave MS&Co. all its capital market business, but also kept tens of millions of dollars in compensating balances with Citibank, Morgan Guaranty, Chase and other commercial banks.

A final element was that capital market issuance was surrounded by a regulatory moat. In 1973 it was clear to Exxon that issuing bonds was more cost effective than borrowing from banks. However, issuing bonds was not a simple matter. SEC rules coming out of the Depression involved a complicated registration process. New issues required a completely new prospectus. This in turn required up-to-date audited financials. Meanwhile, outside counsel dutifully warned of the risks of violating securities laws with out-of-date figures or inadequate disclosure. Since companies like Exxon didn’t issue frequently, each new deal was likely to be shepherded by new managers. From the CFO on down, it was comforting to have MS&Co.’s seasoned bankers overseeing the process.

Finally, Morgan Stanley and its rivals surrounded bond underwriting with protocols suggesting that great acumen was required to price an offering. In retrospect, there was perhaps a ¼% variance between an optimal and an average execution. At that time, however, pricing a deal was an event, choreographed with drama and reported to the Board with fanfare.

During my stay in Corporate Finance, we issued bonds to finance the Trans-Alaska Pipeline. A typical issue size was $500 million. The bond syndicate’s fee might be 7/8%, or $4.4 million. Morgan Stanley might keep half of this depending upon how much it chose to underwrite. Investment banks were partnerships in this era. Total firm capital might be $10 million or less. A single $2 million fee was a huge step towards a good year for the firm.

This was a cozy and comfortable world for both Exxon and MS&Co. When I left Corporate Finance in 1975, nobody suspected that an Exxon executive would upend this world within three years.

Jack F. Bennett was a rambunctious prodigy within Exxon’s then gentlemanly culture. Bennett came to Standard Oil of NJ (Exxon’s older name) in 1955 after taking a PhD in economics at Harvard and working in government. Identified for high places early on, Bennett rotated into finance jobs in New York, Houston and London. In 1971, Exxon let him join the Nixon administration. There he served as Assistant Secretary of the Treasury. In that role, Bennett supervised the auction of Treasury securities, and became fascinated with auction techniques. Bennett began to wonder why Exxon, who shared a AAA rating with the Treasury, couldn’t also auction securities to investors. Returning to Exxon as CFO in 1975, Bennett began planning to try this strategy.

The relationship with Morgan Stanley stood squarely in Bennett’s path. Direct auctions bypass the underwriting process. With an auction, it wouldn’t be necessary to use MS&Co. to read the market, “build a book” of buyers, or price the issue. Bennett thought that Exxon bonds were prized instruments, “museum pieces” in the parlance of the day. He didn’t think Exxon needed anybody to sell its bonds. They would sell themselves and investors would bid aggressively to get their desired lots. This approach left Morgan Stanley on the sidelines. What would that mean for the “relationship”?

Bennett didn’t much care, but he thought his Management Committee colleagues might be concerned. There might also be second guessing if Bennett’s scheme didn’t fare well right out of the box. Bennett didn’t doubt that in the clubby world of 1970’s Wall Street, MS&Co. would try to persuade its peers to cause Exxon’s auction to fail. To hedge these risks, Bennett hired MS&Co. to “study” how to execute an Exxon auction. Unsurprisingly, Morgan Stanley told Bennett it was very risky and probably wouldn’t work as well as a conventional underwriting.

Bennett went ahead anyway. He had MS&Co. organize the auction of $45 million tax-exempt pollution bonds, and then act as one of the bidders. The initial results were ambiguous. As Bennett expected, MS&Co. maneuvered to deny a successful result. Undaunted, Bennett tried again, this time with a $250 million offering of Valdez Terminal tax-exempt bonds. This time the results were clearer. Bennett felt he had confirmation that direct auctions saved fees and obtained a better execution than Morgan Stanley-led underwritings.

That was it for Morgan Stanley as Exxon’s relationship bank. For the next decade, MS&Co. was conspicuous by its absence from Exxon’s capital market deals. Bennett went happily forward, probably unaware that he had pulled the rug out from under relationship banking. In subsequent years, virtually all of Morgan Stanley’s top clients began to run competitions for their offerings. Unsurprisingly, banker fees took a big hit.

The outcome of this process can be illustrated by a deal I headed in 1987. By this time the SEC had streamlined the securities registration process. “Shelf” registrations allowed firms to announce offerings at any time while incorporating “by reference” their SEC financial reports. Investment banks also had changed. Many were now public companies with big balance sheets. These they tried to use to advantage by buying and selling whole deals. On a morning in March 1987, I received a call from Salomon Brothers advising that conditions were favorable for new issuance. Getting quick front office permission, I organized an auction for $250 million of two-year notes. Six investment banks bid “all-in” yields at which they would buy the notes. Their fee would be earned by then selling the securities at a slightly lower yield. Salomon bid 6.24% all-in. Merrill Lynch bid 6.23%. I asked treasurer Edgar Robinson if we should give the deal to Salomon; they, after all, had alerted us to the favorable market. Robinson’s answer— “a basis point is still a basis point.” Merrill got the deal. Such was the condition of relationship banking in 1987.

Bennett’s dismantling of underwriting syndicates and old school relationships coincided with other events. Stock brokerage firms found that improved communications increasingly favored national networks over local firms. The first effects of electronic trading were also evident. Brokerage commissions began to totter. Recognizing the trends, the NYSE ended fixed commissions in 1978. As for commercial banks, they spent the 1970s watching their corporate clients migrate to capital market issuance. Increasingly consigned to the role of “middle market” lenders, Citi, Chase and their compatriots began to ponder revisions to their competitive models.

Thus, as the 1970s gave way to the 1980s, all branches of U.S. banking felt threatened by commoditizing forces. Bennett would not have been able to bypass the syndicate system if that system offered some enduring advantage. Bennett showed that this wasn’t the case, and corporate America followed his lead. Commercial banking and brokerage had similar problems. In each sector, top bankers sensed that they needed to reinvent the business.

Since the best minds were at the investment banks, these led the way on remaking their industry. Within commercial banking, Citibank took the lead— which turned out to be organizing an invasion of investment banking’s turf. Big changes were afoot. For those unwilling or unable to change, the commoditization of old Wall Street offered another fate— extinction by buyout or merger.

Wall Street Restructures, Consolidates, and Innovates

The solutions to Wall Street’s deteriorating business were not obvious, and they were not gleaned via a single flash of inspiration. The investment banks first sought to reinvent their core business. They also did what comes most naturally to an industry on the defensive. They consolidated, buying or merging with abandon. In the process they discovered some other things. First, the small partnerships needed to get bigger. They needed to do this because big outsiders, like Citibank and American Express, were entering, and because it takes funding to be a buyer rather than the target. This led to a second conclusion— the best route to bigness was to cash out the partnership and become a publicly traded company.

This consolidation process began unfolding in the late 1970s. Two “bulge bracket” firms were the first movers. Kuhn Loeb merged with Lehman Brothers in 1977. Salomon Brothers went public shortly thereafter. Merrill Lynch, a public company brokerage chain with investment banking aspirations, gobbled up White Weld in 1978.

Consolidation accelerated in the 1980s. Lehman Brothers merged with the Shearson brokerage firm, and then was acquired by American Express. Bear Stearns went public in 1985. Morgan Stanley followed in 1986. First Boston executed a complex stock exchange with Credit Suisse in 1988; it then surrendered fully to the Swiss firm in 1990. By that date every 1970’s bulge bracket firm except Goldman had either merged, gone public or both.

Consolidation proved not to be a cure-all. For one thing, commercial banks were entering investment banking. Citibank and J.P. Morgan pioneered the use of holding company structures to circumvent the Glass-Steagall Act’s prohibitions on selling securities. Foreign competition also complicated the scene. European universal banks faced no home prohibitions on permitted lines of business. It was easy for Deutsche Bank or Barclays to come into New York, disdain retail deposits, and hang out an investment banking shingle. U.S. investment banks saw little relief from competitive pressures.

The investment banks found a second path that produced better results. As the survivors got bigger, they discovered a capacity to bear more risk. Several began to imitate commercial bankers, positioning themselves to be deal lenders. The most prospective situation was the corporate takeover. During the mid-1980s, investment banks fostered high profile buyouts. This business was very lucrative. Bankers earned rich advisory or defense fees for closing the transaction and more fees for underwriting the deal’s financing. Eventually they discovered that lending to buyers could get a deal closed that otherwise might fail for lack of financing. Thus, investment banks began making “bridge” loans. These became bigger and bigger, eventually exceeding a billion dollars for a single deal.

The M&A business was, however, unpredictable. It depended on volatile factors, stock price valuations and financing conditions. One to two years of feast could be followed by famine. The business also became increasingly competitive. Indeed, commercial banks waded in waving even bigger checkbooks. M&A activity, while a major business line, was not by itself going to provide Wall Street with a sustainable business model.

Further reinvention was thus required to resuscitate investment bank margins. Increasingly the banks turned to the next generation financial academics for help. They began hiring PhDs in math, statistics and even sciences such as physics. The “quants” arrived on Wall Street.

This movement was rooted in theoretical advances that were disseminated during the 1970s. These would become known as Portfolio Theory, the Efficient Market Hypothesis, and Options Theory. All three made an appearance in courses I took at NYU at that time. Portfolio Theory argued that it was possible to build a statistically optimized portfolio where overall risk would be minimized by proper diversification. This approach de-emphasized individual stock performance. Investors instead would “own the market” and be left with a choice of whether to weight this portfolio to be more or less risky than the market average. This seemed to vastly simplify investing and in important ways it did. The Efficient Market Hypothesis (EMH) complemented Portfolio Theory. In its strong form, it argued that the stock market rapidly digested public information and reflected it in stock prices. Consequently, it would be difficult for investors to outperform the market by analyzing and picking selected stocks. EMH went on to argue that investors would thus be better off by simply “buying the market” and saving the transactions costs implied by trying to trade “losers for winners.” As for Options Theory, it provided a means to price the value of call and put options on stocks. Such options had long existed, but their values remained mysterious. In a 1973 paper, two professors, Fischer Black and Myron Scholes, provided the formula. So long as stock price fluctuations conformed roughly to a “normal statistical distribution,” stock options could be valued.

At first glance it might not seem obvious how these advances in theory would revolutionize Wall Street’s business. In one sense they further undermined the asset management business. Encouraged by these ideas, Exxon fired most of its fund managers. It then brought in its own quants to set up an index fund. Henceforth, about 90% of Exxon’s multibillion-dollar pension fund would be invested to track the S&P 500 or other such indexes. Other corporate treasurers followed suit. Asset management began to look like just another Wall Street business in decline.

Wall Street’s particular genius however, is to look at innovation from different angles with an eye towards spotting profit potential. This act they now performed brilliantly on the new theories. Industry thinkers looked at the EMH and noticed it applied pretty much only to the American stock market. By inference, all other markets were inefficient. Bankers started with one advantage— they already understood the bond market to be less efficient than the stock market. Bonds were largely bought by “buy and hold” customers. These investors also didn’t do much, if any, analysis. Instead they relied on the rating agencies to evaluate credit, while they engaged in comparison shopping among the offerings.

This meant the bond market was ripe to be exploited if one had an information advantage. The banks already knew the securities being traded better than their buy and hold clients. With the quants in house, they thought they knew how to gain another edge. Through good statistical analysis they could spot securities whose prices were out of line with comparable bonds. They thought simi-lar analysis could also allow them to value options that referenced (were “derivatives” of) underlying securities. This led to the biggest insight of all—if you could invent something new, you would understand it better than your customers. You then could sell it and trade it at better prices than other market players.

As this thinking solidified, a torrent of invention rippled through Wall Street. Each week my inbox would fill with Investment Notes and such circulars from leading investment banks. Some were technical, explaining the fundamentals of, for example, bond duration. Others flogged new products. I especially remember being marketed to have Exxon do a “swaption,” i.e., issue a bond and simultaneously purchase an option on an interest rate swap. The idea was that Exxon would ultimately harvest more cost savings from being able to choose fixed or floating rates in the future than it lost by paying for the option up front.

While clients were struggling to sort out value creating ideas from snake oil, trading experiences were educating the investment bankers; this led them to another discovery— there was a lot more money to be made trading bonds than in helping clients issue them. Indeed, bankers’ objectives began to change to getting clients to issue so they would have something to trade.

Quantitative analysis and the search for trading vehicles thus produced a raft of innovative securities. The late 1980s and early 1990s saw the following securities markets grow from infancy to early maturity:

• High Yield (Junk) Bonds
• Mortgage-Backed Securities
• Asset-Backed Securities
• Remarketed Floating Rate Notes
• Dutch Auction and Remarketed Preferred Stock
• Non-Recourse Project Bonds

In parallel, over-the-counter markets for interest rate and currency swaps, commodity futures and options, and stock options also developed. Bankers then found niche opportunities to combine these with underlying securities.

When, in 1989, the Berlin Wall came down, bankers quickly realized that a host of even less efficient foreign markets would be available to exploit. The age of investment banks turning into global trading houses had begun.

As I headed out the door for an overseas assignment, I noticed that the investment bankers calling on me had changed. The difference was subtle, and I didn’t give it much attention. Later events caused me to reappraise this impression. I had begun to see that the capital market bankers servicing the Exxon account were no longer the best and the brightest. The real stars only came out when we wanted to do something bigger, like sell a business or launch an Employee Stock Ownership Plan. Also, the bankers calling on Exxon didn’t seem to care that much if they lost a particular deal. Some seemed to bid just to be seen, not to win. Others were too busy moving on to the next client with the next transaction. Exxon had begun the move away from relationship banking. Now it was beginning to see the fuller implications of what that meant.

Trading Dominates Banking and Client Relations Change

After an overseas assignment, I returned to working with banks in 1997. As treasurer of Exxon Chemical Company, I hired bankers to assist on project financings and to sell non-core operations.

Almost immediately, casual comments from bankers set off my antenna. Several of them spoke disparagingly about capital market transactions. Whereas in the 1980s an Exxon deal was a prized transaction, now bankers talked about bond deals as a “loss leader.” In part, this reflected Exxon’s success in extracting excellent terms and low fees. In part it was a comment on the business. Bankers knew where the real money was, and it wasn’t in helping corporate clients tap capital markets. With Exxon, the only real money to be made was in M&A.

A second item of note was the banker’s haste to finish deals. We sold several businesses during 1997–98: a polypropylene twine business, a polyethylene film business and our stake in Nalco-Exxon Energy Chemicals. In each case, the bankers kept their eyes on the clock. On more than one occasion, they triggered conversations about getting the deal done before year-end. They had their eyes on the annual bonus cycle. One finally laid it out for me—he expected 60–80% of compensation to come from his bonus. Only deals completed by December 31 would be counted. There was no partial credit for deals still in development.

The real shock came with my first banker conflict of interest. One assignment saw me attempting to sell off chemical assets in Australia. Asian markets collapsed in 1997, and chemical asset prices declined with them. To create a better value proposition, we agreed to merge our assets with those of Orica, Australia’s biggest chemical company. First Boston was already in the picture as deal advisor. They advanced a good idea—sell off the joint venture while it was being formed.

We started moving down this path. First Boston (FB) produced three names as potential buyers: Koch Industries, Sterling Chemicals, and Acetex. We had heard of the first two, but not the third. Quickly, however, Koch and Sterling disappeared. Acetex expressed serious interest, so we moved forward with them. Acetex turned out to be a private equity firm in Vancouver. The firm owned a few businesses and had as CEO one Brooke Wade, a figure of some repute in Canadian chemicals.

As we negotiated with Acetex, I asked FB to continue looking for other buyers. They swore there was no one else. This seemed strange. Where were other private equity players, Australian interests, and foreign chemical companies? Typically, Exxon got as many as 15 interested parties when it put operations up for sale. Again FB swore that they had searched extensively, and only Acetex was interested.

Only later did we learn that the head of FB’s chemical M&A business was also an Acetex director.

FB helped construct a financing package for Acetex that included: a) senior bank debt led by Chase; b) “mezzanine” high yield debt placed by FB; and c) an Acetex stock offering again led by FB. Next to the fees FB would reap from these deals, the Exxon/Orica advisory fee would not loom large. I began to wonder for whom my advisor, FB, was working.

Apparently, I wasn’t the only one wondering. As we negotiated, Brooke Wade brought a small Houston firm, Schnitzius & Vaughan, onto his team. Eventually, I asked Brooke why he had done so. His reply was: “S&V is here to watch my New York bankers.” Tom Schnitzius later confirmed that he understood his role to be resisting the other bankers’ efforts to persuade Brooke to pay any price needed to close a deal.

In August 1998, Russia defaulted on its sovereign debt. Our Acetex deal collapsed under the weight of its complicated financing package. Shortly thereafter, we learned of FB’s conflicted posture and ended their advisory role. I then learned the nature of Acetex’ concerns, and the purpose of Schnitzius’ presence at the table. Together all this data provided an answer to the question: “for whom are the bankers working?” They were working for themselves. Client relations and loyalty didn’t really matter much anymore. Banks would use their advisory role to shape a deal to their specifications, which usually included as quick a closing and the most lucrative financing package possible.

I might have dismissed this as an isolated event but for confirming experiences that followed. In 2000, I had to fire FB from another advisory assignment. When we merged with Mobil, ExxonMobil Chemical inherited FB as finance advisor for the Jose Olefins project. It soon became apparent they were only interested in advising on a project bond deal underwritten by FB. Interest in other financing possibilities, e.g., bank financing, local currency funding, Islamic funding, was not there. Searching for genuine advice, I visited Morgan Stanley. They too only wanted to underwrite a bond deal. Discussions there ended quickly.

Gradually, ExxonMobil found other bankers whose advice seemed less conflicted. These banks had foreign names; Societe Generale, ABN AMRO, and Deutsche Bank. Sensing a vacuum, these firms, which wouldn’t have gotten more than a “meet and greet” ten years earlier, moved into the relationship banker role. They would land big advisory mandates from Exxon, including huge financings for Qatar and Papua New Guinea LNG.

At the time I attributed these developments largely to Wall Street’s compensation model. The bankers all seemed driven by their annual bonus cycle to run roughshod over principles like putting the client first and avoiding conflicts of interest. Compensation systems were certainly part of the story. But, they were not the whole story.

This was driven home by another encounter. In 2002, Citibank invited me to a client gathering at Pinehurst. After golf and dinner, a Citi Senior Vice President addressed the group. His message was for his fellow bankers, and it boiled down to this: in the wake of Sarbanes-Oxley, bankers could no longer talk to the firm’s stock analysts with an eye towards influencing their research. He was sorry this was the case, but that’s just the way things would have to be from now on. Listening as an outsider, the Citi banker seemed to be saying: yes, we slanted our research to aid in getting deals and selling securities, but we’ve been caught, so cool it [for now?].

From that moment, I ceased to believe that any New York investment bank could be trusted to put its client first. All seemed to be hugely conflicted. Only carefully crafted mandates and intense watchfulness could obtain even a modicum of disinterested service.

Later on, I learned more about the political situation of the bankers inside the investment banks. They were now operating at a major influence disadvantage relative to the traders. Some of their quest for revenue generation was personal. Some of it, however, represented a desperate effort to keep up with the huge profits that trading platforms seemed to be generating effortlessly. To bring home transaction revenues, a Wall Street banker might first have to win a competition against 3–6 other firms. The deal might then take 12–24 months to close; sometimes, as with Acetex, no deal occurred. If a deal did close, fees might range from $10–30 million. In 2000–05, good individual traders were generating that kind of revenue in 3 months.

In short, Wall Street had moved on. An Exxon transaction was no longer that interesting. FB, Morgan Stanley or Goldman could take them or leave them, which they now frequently did to the foreign banks.

Prelude to Financial Crisis

By the time I retired in September 2004, Wall Street had refashioned its business model. Securities invention, distribution and trading were now the core franchises. These activities were melded into a production line. Innovative technicians continued inventing new instruments. Others applied well tested formulas for turning the innovations into marketable securities. A global distribution system found buyers. It was no longer surprising for a Middle East sovereign fund to own bonds backed by Michigan credit card receivables. Meanwhile, trading platforms built and sold huge positions. Traders were able to do so because they were backed by large balance sheets leveraged 30/1 or more.

Nowhere was this more visible than at Goldman. No longer was the firm a $10 million partnership, Goldman now boasted NYSE listed shares and about $10 billion in equity capital. Inside the firm, large trading platforms predominated. In 2002, Lloyd Blankfein’s capital markets/currency franchise alone made almost $1 billion pre-tax; all of Goldman’s banking businesses contributed only $376 million. Within Goldman, special internal partnerships had also been formed; these allowed Goldman executives to act both as firm employees and as private investors.

The big trading model had obviously achieved notable successes. The harder question was: “Is it sustainable?” Trading is a zero sum game. Somebody loses whenever somebody wins. How could Goldman and its chief rivals convince their demanding clients that they would be the one’s winning consistently?

Their answer lay in continuously creating new information advantages. Sometimes this would involve new instruments, which grew ever more complex as the first millennial decade rolled on. Sometimes it involved convincing the rating agencies to evaluate risk using a certain model, one the banks were sure would produce congenial answers; and sometimes it involved an imperceptible flow of proprietary information from the banking side of the house to the trading platforms. It all added up to “smart money” continually exploiting “dumb money.” The banks, sitting on top of the pulse of global markets, able to hear inside information from their colleagues, constituted themselves as the smart money. Everybody else, clients, correspondent banks, counterparties, rating agencies and regulators all formed part of the dumb money crowd. Continually selling this crowd ideas and instruments at inflated prices, and then buying them back when reality produced fire sales—such was the new sustainable advantage on Wall Street.

The bankers I saw in my last years could not escape being influenced by working within this culture. There was an unease about them, as if on some level they knew they were playing a double game. Big money, and the prestige within the firm that came from producing it, seemed to own them. Their recitations of certain banking “motherhood” statements seemed transparently insincere; one almost laughed when they talked about “Chinese walls” within the firm protecting sensitive information. Questions of “right and wrong” hardly ever arose in such categorical terms; at best there might be a discussion of applicable law and how best to wire around it. Hiring them to be an adviser was like negotiating with a sovereign state. The bank and its bankers had their interests. You, the client, negotiated to see if somehow you could frame matters for their interests to coincide with yours, or deploy sufficient leverage to temper their tendency to work for themselves.

These were the business model and banker mindsets which Wall Street would take into the financial crisis. Wall Street bankers will tell you that this was not so— that Bear Stearns and Lehman were very different from J.P. Morgan or Goldman. There is a germ of truth in this, but not one that changes the fundamental argument. Politically and economically, trading now dominated Wall Street. It shaped compensation systems and who ran the firm. If there were differences among firms, they largely concerned the rigor, or lack thereof, that individual firms applied to managing the risks of their trading books.

As students consider the cases that follow, they will face dilemmas posed by certain problems with this model. For one thing, continually inventing information advantages is difficult. This is especially true for an entire industry; some banks may be able to do it for a while. Others will fall behind. When these laggards see the consequences of second tier performance, what will they do? Will they be forced to attempt ever more problematic “mining” of client information, manipulation of rating agencies and regulators, and incomplete disclosure? Will the leading firms then have to follow such bad practices to keep their advantage? What sets the limit on this type of behavior once it takes root and yields success?

For students interested in whether Wall Street could have acted more ethically, this history poses severe challenges. First they must consider if more ethical behavior also requires a less trading-based and lower return business model. If so, is this alternate model sustainable competitively? Second, they must consider where to find support within organizational structures deeply compromised by a “get the result, and don’t look too closely at how it was done” culture. Third, the cases deal with a regulatory environment pointed toward more deregulation and starved for enforcement resources. Even in the wake of SOX, can this regulatory environment provide answers for those seeking redress of illegal activities?

The answers will not be easy to come by. Yet, as with the Enron cases, more opportunities exist for better outcomes than at first would seem the case. The first millennial decade also saw favorable developments. Top management now faces personal liability for financial reporting errors. There are also new protections for whistleblowers. Communications technologies create more ways to shed light on dubious practices without exposing oneself.

Students should thus try to take the tactical toolkit inherited from the Enron cases, consider the new financial industry context, and see what might work in this different setting.

The cases that follow treat the financial crisis in three ways. The first set of cases focuses on decision makers facing choices that will influence the fundamental course of their enterprise. Here you will meet Countrywide’s CEO Angelo Mozilo as he decides whether to follow a competitor down the path to unsound mortgage underwriting practices. Here you will encounter Goldman’s Hank Paulson and Jon Corzine as they debate whether their firm can manage the conflicts inherent in proprietary trading. Fannie Mae’s CEO Jim Johnson considers what advice to give his successor about the politics of serving its several masters.

The second set of cases presents decision makers struggling with the consequences of earlier decisions. Here, Goldman’s Fabrice Tourre must decide what to tell clients about his ABACUS 2007-AC1 deal, when his own firm is positioning itself against the securities he is selling.

The final set of cases focuses on resisters. They explore the legal landscape facing whistleblowers after SOX. They also use the stories of Moody’s Eric Kolchinsky and CitiMortgage’s Dick Bowen to examine the expanded options and still-difficult choices facing whistleblowers.

Good luck and enjoy the cases.