Zeal must be tempered by a culture of integrity: a lesson manifested in the company of Bill Salomon.

• Author: Kaufman, Henry
• Position: COMPETITIVE EDGE

CIVILITY, DECENCY, and high ethical standards are essential not only for social and political life but for economic and financial progress as well.

For a generation or so after World War II, financial behavior was sensible and moderate. The excesses of the late 1920s, which many believed led directly to the long collapse that followed, were still fresh in the national consciousness. More than that, the New Deal regulatory regime had put into place a host of restraints governing the financial sector (and several others). Wall Street managers and traders generally acted conservatively in lending and investing.

But that prevailing culture began to change as memories of the Great Depression faded and regulatory restraints were gradually relaxed. From the mid 1960s through the - latest financial debacle, there have been 15 U.S. financial crises of varying sizes, and many more around the world. The recent financial crisis is by far the worst in the postwar period. If not for intervention by the federal government and the Federal Reserve--however belated--many major financial institutions here and abroad surely would have failed.

How did this irresponsible financial behavior become so widespread? One reason was that markets have become increasingly depersonalized throughout the postwar period. One by one, leading investment banks shifted from partnerships to publicly held corporations, while at the same lime their relations with clients became more strictly based on quantitative analysis.

I know from my own experience as a senior partner of Salomon Brothers that the shift from partnership to corporation had profound impact over time on the level of our risk taking and in our relationship with clients. Let me give you just a few examples.

During one of our executive committee meetings in the 1970s, a young trader interrupted the meeting by giving Bill Salomon, the then managing partner of the firm, a slip of paper informing him of a very large bond trade we had just completed with one of our institutional clients. Bill asked, "How much did we take out of the trade?" The young trader replied, "A point." Bill then called in the partner in charge of the transaction, who reaffirmed that the firm made a 1-point profit. Bill Salomon's admonition was pointed and brief He said that Salomon Brothers does not take such a profit--the bonds purchased were all highly marketable and the selling institution was a valued client. He ordered the trading partner to...