The newer megabanks paid employees yearly, and allowed them to mostly do with their money what they wanted, leaving little financial stake in their banks. Size also diminished the sense of community; many firms now had employees well into the hundreds of thousands. For some, the only thing that now linked them to the banks that employed them was the yearly bonus and a few sad cheerleading emails from HR.
The relationship to customers also changed. As the industry expanded the distance between bankers and borrowers increased, hidden behind increasing layers of financial engineering. Borrowers no longer walked into a bank to take out a loan. They walked into a lending company in a strip mall, which then sold their loan to a third party, who then sold it to another middleman, and so on, until it eventually was bought by a Wall Street bank who would then put it in a big pile, slice, dice, tranche, and CDO it, and then finally sell it to distant and often foreign investors. Or, as many did, just keep it as one of the bank’s ever-growing investments.
In this era of complete regulatory permissiveness, Wall Street morphed into floor after floor of traders, like myself, sitting behind walls of computers, watching numbers flash, moving other numbers around spreadsheets, and betting on them all. If the bets worked out, they would get paid millions. If they lost, they only got paid hundreds of thousands. Nobody ever had to give anything back to the bank, or to the customer, no matter how badly they erred.
Wall Street was a huge digital neighborhood, almost completely unpatrolled, and steeped in a culture with a diminished sense of fiduciary responsibility to the firm, the customer, or really anyone. It was, in language Giuliani would understand, an environment filled with broken windows, and conducive to abuse.
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One of the intellectual frameworks of the broken-windows theory was a psychological experiment from 1969 by Philip Zimbardo, in which a car, stripped of any ownership (plates removed, hood up) was placed in a bad neighborhood in the Bronx, and in a good one in Palo Alto. The car in the Bronx was quickly surrounded by residents, stripped, and left denuded except for a steel frame. Twenty-four hours later it became an impromptu jungle gym for kids. The car in Palo Alto was left alone until Zimbardo himself started vandalizing it, then others joined.
The lesson, according to broken windows, was that “the appearance of disorder begets actual disorder—and that any visual cues that a neighborhood lacks social control can make a neighborhood a breeding ground for serious crime,” wrote journalist Daniel Brook in a piece critical of the theory. Put simply, don’t leave a car unattended in the South Bronx.
A similar adage applied to Wall Street: Don’t leave a rule unattended. By 2001 you could walk into any Wall Street bank and give them a new regulation or a rule. The result would be the same. Within a few weeks the rule would be surrounded by a scrum of lawyers and traders, stripped of any real meaning, denuded of all except the most absurdly benign interpretation, and the remaining flimsy frame used by traders as an impromptu platform for making money.