News

The Recession Will End … When Trust is Restored in the Financial Industry

Says who: JPMorgan Chase CEO Jamie Dimon

“No discussion of the future of the financial system can be complete without an acknowledgment of the industry’s responsibility to re-earn the trust of the American people. How do we earn trust back? First, company leadership must foster a culture within their institutions that focuses on integrity, strong execution, quality products, long-term value creation, and doing the right thing. Rewards have to track real, sustained, risk-adjusted performance. Golden parachutes, special contracts, and unreasonable perks must disappear. There must be a relentless focus on risk management that starts at the top of the organization and permeates down to the entire firm. This should be business-as-usual, but at too many places, it wasn’t.” (via WSJ)

Why it might be false: Restoring trust in an industry that brought down the global economy will probably be so tough that we’ll see growth in other key sectors of the economy before there’s actual, real trust here. Dimon pays nice lip service, and if he means it, it’s comforting to hear that the leadership of a major financial institution has publicly called for streamlined regulation and actions to restore trust in the industry—but diverse reviews of Lehman one-year out, ranging from Politico to the New York Times, point out that hardly anything has changed. Lavish bonuses are back; significant, meaningful regulation of the industry isn’t a reality; and zany investment securities are becoming hot new things again. If the last year didn’t shock the industry to action, what will happen during a year of growth, even if it will probably be low and slow?

Dimon pays nice lip service, but reports on the industry one year after Lehman’s collapse note that hardly anything has changed.

Why it could be true: Trust in the financial industry will only happen when the majority of Main Street can feel at ease with their health insurance, 401K, kids’ college educations (when applicable), jobs, and houses, right? All of these factors link to the health of the overall economy and a fully functioning financial services industry. Logically speaking, if these issues are resolved, then the recession must be over, and the financial services industry can again be trusted. Logically speaking, that is.

Our call: Measuring real trust is going to be a tough call since a rising stock market and other positive economic factors can create a false sense of security (see rally, summer of 2009). The test of this trust will be the consistency of positive factors. When we see this consistency and Main Street truly trusts Wall Street again, we’ll know that economic balance has been restored. Wall Street threw Main Street into a curve ball this last year with the gyrating markets. While Main Street isn’t absolved from their part of the problem (i.e., spending beyond its means, taking out loans it couldn’t afford), restored trust between the two sides will mean that both are focused on productivity vs. the blame game.

Tags: banking, economy, recession, recovery, The Recession Will End..., Wall Street