How big a task did John Taft, head of RBC Wealth Management in the U.S., take on when he decided to write a book about the need for greater responsibility on post-financial crisis Wall Street? Look no further than the book’s foreword by Vanguard founder John Bogle.
Bogle offers a “stinging description of the failure of stewardship.” He continues: “I venture to assert that when the history of the financial era which has just drawn to a close comes to be written, most of its mistakes and its major faults will be ascribed to the failure to observe the fiduciary principle, the precept as old as holy writ, that ‘a man cannot serve two masters.’ ”
The sentiment could easily appear in any op-ed column today, no doubt. But this is from 1934, written by U.S. Supreme Court Justice Harlan Fiske, referring to the financial carnage of that era. Nearly 80 years after the fact it raises the question of whether it’s possible to change a culture that doesn’t seem to learn from the lessons of the past.
Taft believes the answer is yes. “There’s always been periods where greed and self-interest have trumped stewardship. What I’m trying to do is bring stewardship back into the equation, back into the conversation,” he said over breakfast at a midtown Manhattan restaurant last week.
His new book is no apology for the industry. Stewardship—Lessons Learned from the Lost Culture of Wall Street (John Wiley & Sons Inc.), released this month, takes a look at what went wrong in 2008 and why, and what he believes can be done to head off the next disaster. The book already has been endorsed by U.S. Rep. Barney Frank, who calls it “thoughtful, constructive, and, in a word I rarely get to use in the context of the financial crisis, inspiring.”
Achievement and social responsibility seem to be in Taft’s DNA. He’s the great-grandson of former U.S. President and Supreme Court Justice William Howard Taft, and the grandson of Robert Taft, the storied Republican Party leader in the U.S. Senate in the 1940s and 1950s.
Taft, 57, has run RBC’s U.S. unit since 2005; it has about 2,000 financial advisors and $220 billion in assets under management. He’s also a board member and former chairman of the Securities Industry and Financial Markets Association, and has testified before Congress in support of a fiduciary standard for investment pros who offer advice to individual clients.
The fault lies not in Wall Street titans’ stars, Taft says, but in themselves. “Too much attention has been paid to regulatory solutions and not enough has been paid to the importance of culture,” he told Registered Rep. “What you need to make sure is that at any given point the leaders in the industry are people with the right values, who understand that the purpose of the financial institutions they run is to serve clients … At any given point there are leaders on Wall Street who feel that way, and the trick is to make sure that they are in the ascendancy and that that’s the ethic.”
There’s some good news, in Taft’s view. The “balanced, careful regulatory reform” that he supports has already strengthened the global financial system. “Bank leverage levels are way down. Banks have raised $300 billion in capital, so capital ratios are much healthier,” he says. Regulators also have the authority to unwind failing non-bank institutions such as Lehman Brothers and AIG in the manner in which they already can manage bank failures, he adds; it is authority that regulators lacked and “had to make up on the fly” during the 2008 crisis.
“One of the things we learned is, in a world where financial institutions are this interconnected, an extreme event spreads much more quickly and goes much deeper than used to be the case,” Taft says. “So you have to have a bigger cushion in order to prevent it from spiraling out of control.”
Still, the damage of 2008 runs deep. One of the illustrations in Taft’s book is the iconic photo of the US Airways Flight 1549, its passengers crowded atop the jet’s wings from tip to tip after Capt. Chesley Sullenberger safely landed the aircraft it in the Hudson River in 2009. Taft likens today’s investors to those jet passengers—still alive, but traumatized by the damage to their portfolios. “They’ve lost faith,” Taft says. “How do we need to behave to earn back their trust?”
He likes to hold out Canada’s banking system as an example of a better way. (RBC Wealth Management happens to be owned by Royal Bank of Canada.) In a chapter entitled, “World’s Safest Banking System,” he writes that Canadian banks hold most of their mortgage loans rather than package and sell them in the manner that helped damage underwriting standards in the United States. Canadian regulators limit bank leverage, and the banking industry tends to have a more conservative attitude about its business—“Canadians are like hobbits. They are just not as rapacious as American,” Matthew Winkler, editor-in-chief of Bloomberg News, is quoted in the book as saying.
Taft also speaks up on behalf of environmental-social-governance investing; it’s a little early to say whether the philosophy can deliver higher returns over time, but he calls some recent data encouraging. (Companies on Goldman Sachs’ GS SUSTAIN list outperformed the MSCI World Index by 25 percent from 2005 to 2007.)
Some industry viewpoints are starting to align more with Taft’s thinking, he says. He quotes Chas Burkhart, founder of private equity boutique Rosemont Partners, who castigates Wall Street as a “product-selling machine…It should be a client-driven business, but it isn’t today and long hasn’t been one.” And at SIFMA’s annual conference last year, Citigroup CEO Vikram Pandit called for more responsible finance and said, “Banking has to be a means to an end, not an end in itself.” Taft called Pandit’s remarks “extraordinarily positive.
“I never heard Vikram Pandit speak about responsible finance before,” Taft said. “It thrilled me that the head of Citicorp was now talking about criteria for behaving responsibly in their lending activities.”