Friday, April 11, 2008

People (Still) Do The Darndest Things

Apropos of the ongoing angst of who is to blame and how to fix the "subprime crisis," Larry Ribstein at Ideoblog posted this excerpt from Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171 (1933) in which William O. Douglas observed:

"There is nothing in the [Securities Act of 1933] which would control the speculative craze of the American public, or which would eliminate wholly unsound capital structures. There is nothing in the Act which would prevent a tyrannical management from playing wide and loose with scattered minorities, or which would prevent a new pyramiding of holding companies violative of the public interest and all canons of sound finance. All the Act pretends to do is to require the ``truth about securities'' at the time of issue, and to impose a penalty for failure to tell the truth. Once it is told, the matter is left to the investor. . . .

The economy under which we live is not static. Industry is not stabilized and under our present methods never can be. Competition and the progress of invention make it inevitable that many enterprises will fail. The toll of technology over a period of years is enormous. And the downward turn of the business cycle may eliminate more than just the marginal enterprise. Other factors of management, not related to cupidity and fraud, contribute to the same end. As a result, a substantial percentage of industrial investment will in any event be lost. To speak then of underwriting the values which are based on such unstable foundations is sheer nonsense. And to expect that the judgment of investors as respects these imponderable factors will improve perceptibly in this generation is baseless optimism."

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