Imag­ine throw­ing a party for your best cus­tomers and none of them show up.  What would you think about your future?

“Well, about a week ago at a Miami Beach asset-backed secu­ri­ties con­fer­ence, Wall Street pro­fes­sion­als invited their best insti­tu­tional bond cus­tomers to a cool South Beach party and almost no one showed up.

The few cus­tomers who did attend were mostly vul­ture debt investors bar­gain shop­ping among the thou­sands of out-of-favor exist­ing asset backed secu­ri­ties cre­ated dur­ing the boom years.

It only took me a few min­utes to find out what hap­pened to Wall Street’s cus­tomers and why they didn’t show up.

“Of course no tra­di­tional bond buy­ers are here,” one vul­ture investor told me. “I buy bonds that were rated AAA a few years ago for 30 cents on the dol­lar.  The insur­ance com­pa­nies and pen­sion funds − they took it in the shorts.  Who wants to be the dumb money, buy a new issue and watch it drop to noth­ing?  No one’s gonna bet their job on Wall Street ever again. No one trusts them.”

Unfor­tu­nately, while it’s tough to shed tears for Wall Street traders and bankers, the struc­tured finance investor boy­cott has broad neg­a­tive impli­ca­tions for every­one else.Until the secu­ri­ti­za­tion mar­ket recov­ers it will be hard for many con­sumers to get a mort­gage with­out gov­ern­ment help.  Jumbo mort­gages that don’t qual­ify for Fred­die, Fan­nie or FHA pro­grams will remain elu­sive and expensive.

Many small busi­nesses are hav­ing a tough time bor­row­ing money for work­ing cap­i­tal or expan­sion because of the struc­tured finance shut­down.  It was asset-backed secu­ri­ties that cre­ated the liq­uid­ity for many small busi­ness loans prior to the credit crisis.

Like a junkie crav­ing a fix, the com­mer­cial real estate indus­try needs the CMBS mar­ket to func­tion.  In a sign of bad things to come, just two weeks ago Credit Swiss announced lay­offs in its com­mer­cial real estate group.  The bank cited a lack of investor inter­est in buy­ing new com­mer­cial mort­gage backed secu­ri­ties as the rea­son for fir­ing its department.

The real vic­tims, how­ever, were busi­ness and real estate own­ers who were depend­ing upon Credit Swiss to fund their loans. These orphaned bor­row­ers will dis­cover that it’s tough to
find a new reli­able lender.

Free mar­kets advo­cates loudly chant the mantra of self-regulation and eco­nomic self-healing.  But, instead of a get­ting bet­ter, the asset-backed secu­ri­ties new issue mar­ket is DOA with few signs of resus­ci­tat­ing itself.

On the other hand, Dodd-Frank leg­is­la­tion hasn’t worked either.  If Dodd-Frank was actu­ally fix­ing Wall Street’s prob­lems, the asset-backed secu­ri­ties mar­kets would be restart­ing.  The best that can be said for Dodd– Frank is that it hasn’t made things much worse…so far.

The asset-backed secu­ri­ties mar­ket shut down illus­trates that nei­ther the free mar­kets nor Dodd-Frank reg­u­la­tions are work­ing. Amer­ica needs a third way and soon.  Trust, integrity and trans­parency aren’t com­pli­cated but seem hard to achieve for the secu­ri­ties and bank­ing industry.

The solu­tions to Wall Street’s integrity problems

won’t come from Wash­ing­ton and they won’t be easy.If indus­try exec­u­tives want to know how to fix them­selves they should study the Wall Street’s eco­nomic his­tory from 1920 through 1965.  In the 1920s traders ruled the Street and traded their way into a bank­ing induced hous­ing col­lapse, a stock mar­ket crash and the Great Depression.

By 1931 cus­tomers had had enough of Wall Street

and began a multi-decade boy­cott of the indus­try.  Pri­vate finance took the place of secu­ri­ties trans­ac­tion and it wasn’t until the mid-1960’s that indi­vid­ual and insti­tu­tional investors returned in mass to the secu­ri­ties markets.

The most suc­cess­ful firms to re-emerge from irrelevance

Gold­man Sachs and Mer­rill Lynch (now a part of Bank of Amer­ica), built their fran­chises based upon long term rela­tion­ships, trans­parency and trust.  Both firms had a cus­tomer first atti­tude and nei­ther firm bragged about how they made money trad­ing against their customers.

Gold­man Sachs invented stock and bond research.  If they had a good invest­ment idea rather than keep­ing it for their own, they shared it with their cus­tomers and were rewarded with trad­ing vol­ume, assets under man­age­ment and under­writ­ing assignments.

For the asset-backed secu­ri­ties indus­try to restart, invest­ment bankers need to re-learn the lessons of Sid­ney Wein­berg and Charles Mer­rill and replace their focus on exe­cut­ing trades with a myopic focus on doing a good job financ­ing busi­nesses, con­sumers and fam­i­lies.  They need to worry about how they can improve investor returns and always share their best ideas with cus­tomers first rather than use these ideas to enhance their pro­pri­etary trad­ing profits.

Wall Street is loos­ing its rel­e­vance and becom­ing a dinosaur.  Its busi­ness sim­ply can­not exist with­out cus­tomers.  Unless itfun­da­men­tally reforms, and quickly, an entire gen­er­a­tion of bankers and finance pro­fes­sion­als will find that they are no longer relevant.