M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Sunday, April 25, 2010

Summer Reading: Anglo-American Securities Regulation

Martin Wolf at the FT has started a series of columns in which he is thinking about the future of the financial markets.  In his take on the goings-on at Goldman in the wake of the Financial Crisis he made the following observation: 

Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.

All true.  But hasn't Wall Street been an insiders v. outsiders game for as long as it's been around? I'm sure Wolf would agree.  Indeed, populist anger at the insiders for fleecing a naive public isn't a new phenomena at all.  Take for example the South Seath Bubble of the 18th century.  Jonathan Swift's poem, The South Sea Project, about sums it up.

But, I affirm, 'tis false in fact,
   Directors better knew their tools;
 We see the nation's credit crack'd,
   Each knave has made a thousand fools.

One fool may from another win,
   And then get off with money stored;
 But, if a sharper once comes in,
   He throws it all, and sweeps the board.

As fishes on each other prey,
   The great ones swallowing up the small,
 So fares it in the Southern Sea;
    The whale directors eat up all. ...

While some build castles in the air,
   Directors build them in the seas;
 Subscribers plainly see them there,
   For fools will see as wise men please. ...

Directors, thrown into the sea,
   Recover strength and vigour there;
But may be tamed another way,
   Suspended for a while in air.

One of the books on my summer reading list is Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860 by Stuart Banner.  A colleague of mine noticing that I had the book with me remarked that it’s funny how these books get published, move on into obscurity and then following a series of fortuitous events get pushed out in paperback.  Well, I’m glad the publishers decided to put it out in paper back.  So far (I’m just a third in), Banner’s book is a wonderful description of the tensions between insiders and outsiders in early securities markets. 

It seems that “sharpers” have been taking advantage of gullible and optimistic “investors” for as long as people have been trading securities.  Notwithstanding the shocking nature of recent revelations, there isn’t much new in what is now coming out in the papers.  If you read the fine print on page 8 of the boilerplate section of Goldman’s ABACUS flip-book, it says quite clearly that Goldman is not in a fiduciary relationship with its “client”.  Indeed, that same section says:

Goldman is currently and may be from time to time in the future active on both sides of the market and have long or short positions in [the securities that are subject of this offer].  Goldman Sachs may have conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the Issuer thereof, any Reference Entity, or any obligation of any Reference Entity.

You’re on your own is the message.  Same as it ever was, I suppose.  


"Big Short": The Musical 

Bet Against the American Dream from Alexander Hotz on Vimeo.


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