Frank Partnoy on Derivatives
posted by Deven Desai
Lawrence has done some great work on helping us understand the wild world of corporate law and finance. Today, another law professor has some insights about what is going on. Frank Partnoy is featured on Fresh Air. You can listen to the talk at the site, and it has a good excerpt from the afterword to Frank’s book, FIASCO: Blood In The Water On Wall Street’ which has just been re-issued in paperback.
Here is a fun quote:
I thought Greenspan’s laissez-faire zealotry clouded his judgment, and I said so publicly (not that he cared, or even heard). He saw no reason for any legal rules to govern the markets. Greenspan even boasted that there was no need for rules prohibiting fraud, because the markets inevitably would discover it. According to Greenspan, market competition alone, without any regulation, was sufficient, because no one would do business with someone who had a reputation for engaging in fraud. To me, Greenspan sounded a lot like Morgan Stanley’s public relations department.
Frank also has a new book The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals coming out on April 29.
March 25, 2009 at 5:45 pm
Posted in: Corporate Law
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Responses (4)
Frank - March 25, 2009 at 8:02 pm
Thanks for featuring Partnoy. I think he was deeply insightful on the current crisis, bordering on the prophetic. People like him and Daniel Tarrullo will be in the “law prof hall of fame” when the history of the current crisis is written. It’s too bad they were treated like Cassandras for so long.
A.J. Sutter - March 26, 2009 at 9:25 pm
OTOH, was Greenspan wrong about Madoff? The pertinent problem is that econ theory doesn’t deal with time scales. One could argue that Greenspan’s notions were correct in this case; the only problem was that it took an unduly long time to discover the fraud and for the bad reputation to develop.
In this case a regulatory system was in place — but it didn’t directly reduce the time to discovery either. At most, it added to Madoff’s sense of guilt, or at least to his fear of consequences for his family, whom he maybe feared could be implicated or left penniless. But we have no way of knowing whether it was indeed the regulations or else some stirring of moral feeling that led him to confess what he had done. (Of course, in the latter case one could also argue that, pace Greenspan, it was moral sentiments rather than the invisible hand that led to the confession.)
Michael E. Russell - March 27, 2009 at 9:51 pm
What the free market libertarians seem oblivious to, is the fact that it is not a free market of goods and services, it is a free market of ideas, and our government is part of that market. Thus, government regulation IS the action of a free market to protect itself and remove the disease of manipulation and fraud, increasing market health and restoring efficiency. Dumb-ass Greenspan
A.J. Sutter - March 27, 2009 at 11:12 pm
Michael, I think you overestimate the freedom of the market for ideas. The existence of intellectual property regimes in the US and elsewhere suggest otherwise: but for them, e.g., the second (and subsequent)-to-invent, or second (and subsequent)-to-file with the PTO (if there were even a need for a PTO), would be entitled to use their inventions without restriction. IPR regimes are a way in which governments create artificial scarcities of ideas. Apropos of the topic of this thread, derivatives are great counterexample to the claims that without IPR there wouldn’t be any incentive to innovate.
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