Sunday, February 14, 2010

Other People's Money - Louis D. Brandeis

... Recently came across several references to Louis Brandeis' book "Other People's Money, and How the Bankers Use It," published in 1914. And coincidentally after beginning this post came across two more references in recent articles:

Brandeis' book, which began as a series of essays, is remarkable: the wounds to the public interest caused by the "Money Trust" (Brandeis' label for what today is bulge bracket Wall Street) are still being inflicted.

Chapter V ("What Publicity Can Do") is good reading for those interested in this blog's main point. (The book's full text is online.) In the chapter Brandeis prescribes disclosure for the ills of concentrated financial resources, especially the ill of excessive underwriters' compensation.

In the decades that followed the book's publications securities laws mandated the disclosure ("publicity") Brandeis envisioned, and self-regulatory agencies (such as the NASD, now known as FINRA) arguably addressed excessive underwriters' compensation. However, the pathologies Brandeis describes have survived for nearly a century despite disclosure and self-regulation. A few Chapter V excerpts are below:

-"But a main cause of ... [bankers'] large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally 'all that the traffic will bear'."

-"It is to exactions such as these [referring to Brandeis' description of J.P. Morgan & Co.'s "monster commissions" of the era] that the wealth of the investment banker is in large part due."

-"The question may be asked: Why have these excessive charges been submitted to? Corporations, which in the first instance bear the charges for capital, have, doubtless, submitted because of banker-control ... exercised ... indirectly through combinations among bankers to suppress competition. But why have the investors submitted, since ultimately all these charges are borne by the investors, except so far as corporations succeed in shifting the burden upon the community? ... Their submission is undoubtedly due, in part, to the fact that the bankers control the avenues to recognizedly safe investments almost as fully as they do the avenues to capital."

-And for good measure, from Chapter VI ("Where the Banker is Superfluous"): "But the investment banker has, within his legitimate province, acquired control so extensive as to menace the public welfare even where his business is properly conducted."

No comments:

Post a Comment