Wall Street and Broken Social Trust

I’m hardly the first to cast the financial meltdown in terms of broken trust. But usually that means something like "we can’t trust they’ll still give us credit." There is a much deeper, distinctive pattern that leads to broken trust, and it works the same personally as it does socially and economically.

That pattern is the fragmentation of relationships. When relationships are turned into transactions separated by time or space—the predictable result is a lowering of trustworthy behavior, resulting in a lowering of trust.

Here are a few examples:

• Marriage researcher John Gottman says that couples who argue can be quite successful—they remain engaged, in relationship. It’s when the parties disengage, withdraw, refuse to interact, that the marriage is doomed. The relationship is fragmented—trust disappears.

• The airline industry in the 60s (if I recall my corporate finance cases) was funded largely by insurance companies, which lent money to the industry at large, thereby restricting competitive binges of excess capacity. When banks took over the lending, they championed specific carriers. This quickly led to over-capacity, with airlines returning to their customary unprofitable ways. A relationship of industry to industry, fragmented into competitive bank-airline duos, resulted in systemically bad results.

• If you let your teenager stay out at all hours of the night, your teenager will probably get in trouble. A family system fragmented, results in untrustworthy behavior.

• The US regulates banks and stocks. The CDOs which lay at the heart of the mortgage-driven meltdown were not regulated. No one had purview or a common interest across the entire range of financial products. A fragmented relationship, and resultant low trust.

• 30 years ago, the mortgage industry was a system of brokers, banks, and homeowners. All had a common long-term interest in that system, and all had long-term relationships with each other. With the fragmenting advent of specialized brokers, securitized loan packages and the like, no one had to relate to the whole picture, nor to each other for any length of time. Result—abuse and breakdowns of trust.

• The game theory classic Prisoner’s Dilemma pits our fears and aggressions against another player. If you both give in to fear, you both lose. But if you give, and the other person takes, you suffer the worst of all outcomes. The “trick” to successfully playing the game is to increase the number of times it is played—to create a relationship over time.  Which creates trust.

• Another prisoner’s dilemma winning strategy is to make each play more personal—face to face, looking each other in the eye, handshakes. A relationship as opposed to an impersonal connection. Resulting in more trust.

• Pure economic competition is unstable, because all competitors strive for their competitors’ elimination—the absence of relationship. Some form of social interference—rules, regulations, time-outs, referees—is necessary to keep the game going at all.

• Jonathan Knee’s book The Accidental Investment Banker tells of the cynical investment banker acronym IBGYBG—I’ll be gone, you’ll be gone, let’s do the deal. Fragmented transactions, no long-term relationships. And no trust.

• When Marie Antoinette said “let them eat cake,” she articulated a deeply riven society. Which turned out to be untenable, especially for her. No relationship, no trust.

Fragmenting relationships can lead to growth and to scale economies. Teen-agers grow up and learn to handle freedom. Outsourcing business processes can result in larger scale and lower costs. Fragmenting the mortgage industry did result in lower costs and more liquidity. The flip side, of course, is untrustworthy behavior.

Wall Street is just one example of a broader dilemma we face in an increasingly inter-related, interconnected world. How do we balance the scale economies of fragmented business relationships, industries, and business processes, with the trust-creating power of some kind of integrative force?

Regulation is one obvious integrating force. There are also industry associations, and a sense of honor (personal, professional or societal).

We’re running a little low on self-regulation just now (see for example How to Get Your Industry Regulated and Great Moments in Self-Regulation—Financial Planners). And how’s the world doing these days on ethics, public service, and collaboration?

Personally and institutionally, the more we are linked, the more trust flourishes. The more we are disconnected—structurally or personally—the more we distrust.

Turning systems into fragmented markets can increase scale, power and performance—and raise the risk of untrustworthiness. Linking relationships is the countervailing force—the more we view ourselves and our institutions as in relationship, the more we create trust.

As the world gets smaller and more linked, we need to shift more toward the latter.


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