WEBVTT

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All right, good morning.

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I want to talk today
about regulation.

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Well, actually, regulation
and human misbehavior.

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So, this is a continuation of
my previous lecture, in a

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sense, which was about
Behavioral Finance and about

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human foibles.

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But now, I want to go on to talk
about what we do about

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some of these things, and
that means to talk about

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regulation.

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So, I think that regulation of
finance, financial markets,

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and institutions is
substantially directed at

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dealing with psychological
problems, and the tendency for

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some people to exploit human
weaknesses, and manipulate and

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take money from other people
rather than help them.

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But I think regulation goes
beyond this, because it also

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has another, more technical
side, and that's about making

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sure that the financial
system works well.

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For example, regulation deals
with monopolies and

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externalities.

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It's been talked about a great
deal that regulation has to

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take account of the --

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why don't I write this down
-- the ''too big to fail''

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problem, that is, regulation
that deals with systemic

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problems. ''Too big to fail''
refers to a phenomenon that's

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been observed many times in many
countries, that, whenever

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a big firm fails, the government
bails it out.

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And that's because they realize
that, if this firm,

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especially if it's a financial
firm, collapses, it will bring

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down the whole system with it.

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So, that means big
firms have an

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implicit government guarantee.

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Small firms don't.

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This is not the way anyone
wanted it to be, but it

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happens naturally, because big
firms are the only ones that

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can bring the whole
system down.

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So, this tendency then creates
an opportunity for big firms

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to take more risks than small
firms, because they know that

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they have this free insurance
policy from the taxpayers.

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And so, they take bigger
risks and they

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bring on systemic crises.

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So, dealing with this is another
aspect of regulation.

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And it's central to regulation
right now in the wake of the

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world financial crisis.

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Another term I wanted to
emphasize, well, a pair of

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terms: There's two kinds
of regulation, called

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microprudential --

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I think this is a relatively
new word; at least it has

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become popular since the
financial crisis

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of the 2000's --

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and macroprudential.

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So, microprudential --

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prudential sort of means
regulation, dealing with

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prudent standards
for business --

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microprudential regulation
protects the small firms, the

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small people, the individuals.

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Macroprudential protects
the system.

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Macroprudential regulation deals
with the ''too big to

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fail'' problem, and it deals
with other problems that

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affect the whole system.

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I think the history of
regulation involved both of

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these, but I think the mix was
more microprudential then

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macroprudential until
recently.

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So, we'll talk about
both of these here.

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So, I thought I should say just
something first about

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regulation and regulators.

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I'll start with an analogy.

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I think regulators are analogous
to the referees at a

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sports event.

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They enforce rules.

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They decide when someone has
broken the rules, and they can

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punish people who fail to
adhere to the rules.

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But I think that's a good
analogy, because, I think, we

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generally all appreciate the
importance of referees at

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sports events.

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The players often argue with the
referees, but the players

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want them, because it wouldn't
be a very good game if we

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didn't have a referee, right?

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Because the, for example,
dangerous player, or player

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that risks others being hurt, or
deliberate hurting of other

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players would become almost
necessary in order to succeed

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in the game.

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So, this reflects a problem.

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In a competitive system, there's
kind of a race to the

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bottom, right?

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If everyone else is doing
something that you think it's

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shady, well, you kind
of have to do it too

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or you can't compete.

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And so that means people in
the sports world or the

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business world will themselves
ask for regulation, or they'll

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try to do it themselves
as much as they can.

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Just as children, when they
play on an empty lot when

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there's no adults around, will
agree on some rules.

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And maybe they have a referee,
I don't know.

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Usually not.

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They're all referees.

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They're all enforcing
the rules.

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That's what we're talking
about when we talk about

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regulation.

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We tend do admire the players
more than the regulators.

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This is true both in sports
and in finance.

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You know, one thing I'd like to
also say is that we should

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show respect for regulators
and referees.

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It's a profession, and
they're not losers,

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as some people say.

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It's true, the referees in the
sports game probably couldn't

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play the game very well.

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They're probably too old
to play it very well.

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But even so, they have a
different profession, right?

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And some of them are very
good at what they do.

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They don't attract as much
attention, except when they

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make mistakes.

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It's the same thing
with regulators.

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The regulators that I've met
seem to me often to be

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well-meaning, intelligent
people.

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I think it's a career that
you should consider.

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So, when I say I'm hoping that
this class prepares you for a

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job in finance, I'm including in
that a job as a regulator.

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Some people like it better,
because it adheres more to

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their personal sense of moral,
morality, and integrity.

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They would rather be enforcing
good rules of financial

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behavior, than being
compromised.

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I think, maybe it's a different
personality.

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When you're in there in the
game, I mentioned this last

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time, you get compromised
one way or another.

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There's no avoiding that,
because you've got to kind of

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play to the rules, right?

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And if the rules allow
something that is

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questionable, you may
have to do that too.

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I think you should try not to,
but reality is something that

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interposes.

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So, some people will spend years
on Wall Street making

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money, and they'll switch
to a regulator job.

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And it isn't because they
failed on Wall Street.

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I think it's because
life offers many

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different kinds of rewards.

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Anyway, in this lecture, I have
five levels of regulation

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that I want to talk about.

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So, the first one is
the lowest level.

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It's within the firm.

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And maybe people don't always
talk about that as regulation,

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but I'm going to count that.

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Firms set up their own rules.

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There's no government
involved.

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This is just internal.

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Then, there's trade groups, all
right, where a group of

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firms will get together and form
a trade organization, or

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a self-regulatory organization,
and they will

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decide on rules among them.

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Then, there's a local
government.

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That would be at the city-, or
province- or state-level.

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And then, there's national.

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And you can see where I'm
heading, to international.

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So, those are the five
kinds of regulation.

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And I think that the oldest are
the ones at the top of the

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group, and as time moves on,
we're becoming more and more

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broad in geographical scope.

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So, I'm preserving international
regulation for

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the end of this lecture.

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So, let me start with number
one, which is the within-firm

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regulation.

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We've talked about this before,
about the modern

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corporation as having a
board of directors.

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And they could be called
a board of regulators.

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Nobody calls them that, but I
think that they look a lot

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like regulators.

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But they're not imposed
by the government.

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Remember, I said that
a team playing a

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sport wants a referee.

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So, companies want somebody
imposing some kind of

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standards on them as a
group, so companies

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have boards of directors.

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Now, in most companies, they
have both inside directors,

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who work for the firm, and they
have outside directors,

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who have nothing to do with the
firm, except that they're

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on the board of directors.

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I think that it's really the
outside directors that make

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the board of directors into
a sort of regulator.

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In the last lecture I
was talking about

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how people are different.

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And some people show more
character than others.

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That's a problem, a fundamental

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problem, in human society.

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A lot of the people who rank
very low on character end up

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in jail, unfortunately.

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But most of the time, we don't
want them in jail, but we

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can't put them in positions
of responsibility.

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So, society finds some way of
kind of quarantining them so

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that they don't --

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these are all uncomfortable
problems, and --

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I don't know --

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I can't get into all
of the issues here.

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But we don't want them
running a company.

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We want people of character
running a company.

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And so, in a sense, a board
of directors imposes that.

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You put people on the board
who have reputations as

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high-minded people.

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That's the way it should work.

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Anyway, it usually does work.

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High-minded people who, you
know, you'd probably not want

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to propose some shady deal to.

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So, you want to have regular
meeting of these, where you

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talk about what the
company's doing.

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And these people impose a kind
of community standard on what

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the company is doing.

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And it also has an effect on the
standing of the company in

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the community, because they see
the names on the board of

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directors, and they think, well,
this company can't be

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shady, right?

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With these people
on the board.

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When you join a board of
directors, you're merging your

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reputation with the reputation
of the company.

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So, you wouldn't do it if the
company looked shady.

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So, I'll give you an example
of a board of directors.

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I'll use our own most familiar
example, the board of

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directors of Yale University.

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And it's called ''The President
and Fellows of Yale

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College.'' And they
meet regularly.

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They come to campus and
have their meetings.

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But it's a small group of --

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I don't know what the whole
number is, like 20 people.

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I'll give you some examples of
the members of the Yale --

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they also call it the
Yale Corporation.

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Richard Levin, the President of
the University, of course

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is Chairman of the Board.

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The Governor of Connecticut,
Dannel Malloy, has always

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been, going back hundreds
of years, on the Yale

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Corporation.

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So, we have the governor
of the state.

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I'll just give you several
more examples.

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Fareed Zakaria, who was
born in Mumbai, India.

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He's now editor of Time
Magazine, and he's the author

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of many intellectual books.

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And he has a kind of an
intellectual television show,

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public TV, and he's
a Yale alumnus.

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So, he's on the board.

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We also have Indra --

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maybe I should write
these names since

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they're hard to spell.

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Fareed Zakaria, I mentioned.

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And then, Indra Nooyi.

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That one you might have
trouble spelling.

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I don't think she
went to Yale.

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She was educated in India.

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But she's president of PepsiCo,
the big international

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corporation.

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She's a director at the
Lincoln Center for the

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Performing Arts in New York.

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And this is an example of
interlocking directorships.

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So, you judge a director partly
by what other boards

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they sit on.

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And she's chairperson of the
U.S.-India Business Council.

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And I have one more example of
who's on the Yale Corporation.

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Mimi Gardner Gates.

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You know who she is?

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She's Bill Gates' stepmother,
but maybe that's not the way

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to introduce her.

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I just found out that Bill
Gates' mother died in 1994,

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and his father remarried to a
woman who ran the Seattle Art

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Gallery, so she's an
art conservator.

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All these people are people
who have reputations as

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high-minded intellectuals and
members of our community.

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I don't know that Yale is in
strong need of a board of

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directors like that.

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I think we would function
like an

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orchestra without a conductor.

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We could do all right.

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But it imposes, on any
corporation, a sort of

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regulatory standard
that is important.

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So, a board of directors
has a really important

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function, because --

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let's move away from
the nonprofit.

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Yale is a nonprofit
organization.

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Let's consider someone doing
business in a for-profit

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corporation.

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There are way too many

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opportunities for sleazy behavior.

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And you only are willing to
invest in a company, if the

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sleazy behavior is somehow
under control.

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So, I'm going to talk about
maybe the most important kind

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of sleazy behavior
in a company.

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It's called tunneling.

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Tunneling is sneaking away with
value, putting it in your

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own pocket, if you work for a
company, rather than in the

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stockholders'.

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The stockholders own
the company.

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They're supposed to
get the money.

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But the employees have never
met the stockholders.

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And they sometimes think, you
know, there's a lot of things

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we can do and let's do them.

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And the money is going to come
from the stockholders, and

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will somehow end up
in our pockets.

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So I'll give you just examples
of tunneling.

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The company has some asset and
it's going to sell it, right?

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So, asset sales.

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In part of doing business, how
does the company make sure

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that it gets a good price?

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Well, if you work for a company
and you're in charge

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of the asset sale,
you can tunnel.

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You say, I'll sell it to
my brother-in-law at

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a really low price.

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All right.

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He'll wait a while and then
he'll pay me off later.

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That's hard to detect.

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Because how do you know, if you
are a stockholder, how are

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you going to find out?

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That's stealing from
the company, right?

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If you sell it at a
non-market price.

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How does somebody know that?

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I mean, the stockholders can't
be looking at every deal.

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So, I'll give you another
example, contracts.

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The company is signing a
contract to provide something

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to them regularly.

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They can pay too much.

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Now, it could be your
brother-in-law

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who's running it.

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But hey, let's not be
so obvious about it.

19:06.240 --> 19:09.880
It'll just be some guy that I
met, and we're both antisocial

19:09.880 --> 19:11.170
personalities.

19:11.170 --> 19:13.360
We've just discovered
each other.

19:13.360 --> 19:16.870
And, you know, it doesn't even
have to be written down.

19:16.870 --> 19:19.600
I'll give this contract to
you over somebody else.

19:19.600 --> 19:22.070
And I'll pay you too much.

19:22.070 --> 19:25.470
And, you know, sometime later
you take care of me.

19:25.470 --> 19:28.840
You know, I did it for you,
you return the favor.

19:28.840 --> 19:31.370
This is tunneling.

19:31.370 --> 19:33.340
Another one, executive
compensation.

19:39.270 --> 19:42.710
The CEO decides to pay his
friends in the company, his

19:42.710 --> 19:47.620
cronies, very high salaries.

19:47.620 --> 19:50.150
And he would defend it, if
anyone asked, by these people

19:50.150 --> 19:53.100
are worth every penny.

19:53.100 --> 19:55.200
Who knows what somebody is
worth, and who's going to

19:55.200 --> 19:56.450
judge that?

20:00.826 --> 20:03.616
Expropriation of corporate
opportunities.

20:10.960 --> 20:13.940
See, one of the most valuable
things about a company is that

20:13.940 --> 20:16.830
you're in the business and you
know what's happening, right?

20:16.830 --> 20:20.010
And your company is producing
a certain kind of product.

20:20.010 --> 20:22.850
Then, someone comes along and
says, you know, I don't really

20:22.850 --> 20:25.190
want your product, but you seem
like the kind of people

20:25.190 --> 20:28.280
who could produce something
that I really need.

20:28.280 --> 20:29.780
Something else.

20:29.780 --> 20:33.400
And so, you as a director, as a
president of a company, you

20:33.400 --> 20:38.490
should say, OK, we can do it.

20:38.490 --> 20:39.550
But you don't do that.

20:39.550 --> 20:44.350
Instead you say, I'm setting up
a new company with my name.

20:44.350 --> 20:47.580
Or my brother-in-law is setting
up a new company.

20:47.580 --> 20:49.620
And you tell him all the
corporate secrets and

20:49.620 --> 20:51.240
how he can do it.

20:51.240 --> 20:52.570
That's tunneling, again.

20:55.700 --> 20:57.350
And of course, there's
insider trading.

21:01.060 --> 21:09.540
That's when people in the
company will buy or sell their

21:09.540 --> 21:15.530
own shares based on knowledge
that they have, that they

21:15.530 --> 21:17.400
haven't told the public yet.

21:17.400 --> 21:19.930
So, if you know that the
company's going to collapse,

21:19.930 --> 21:21.970
you sell your shares
right away.

21:21.970 --> 21:24.530
If you know the company has some
great news, you buy them

21:24.530 --> 21:26.290
before you announce it.

21:26.290 --> 21:28.410
That's tunneling again, because
you're taking money

21:28.410 --> 21:31.610
out of the company because of
the opportunities you have as

21:31.610 --> 21:33.700
part of the management
of the company.

21:33.700 --> 21:35.830
You see how many different ways,
and I haven't listed

21:35.830 --> 21:37.870
them all, there's
many, many ways.

21:37.870 --> 21:40.190
Companies do so many things.

21:40.190 --> 21:42.230
So, why would you ever
invest in a company?

21:42.230 --> 21:46.390
You might think there's a
million ways to get money out

21:46.390 --> 21:47.230
of a company.

21:47.230 --> 21:49.560
And the people, who are running
it, don't know me.

21:49.560 --> 21:51.770
They don't care about me.

21:51.770 --> 21:54.540
That's why a corporation is kind
of a delicate thing to

21:54.540 --> 21:55.780
work at all.

21:55.780 --> 21:59.110
It has to have some way of
controlling all these things.

21:59.110 --> 22:02.770
And there's so many of them
and they're so complex.

22:02.770 --> 22:05.150
I would say, that's why we have
boards of directors, and

22:05.145 --> 22:10.125
why we put people of
known reputations

22:10.130 --> 22:15.200
on boards of directors.

22:15.200 --> 22:18.580
So, this is maybe the most
essential kind of regulation,

22:18.580 --> 22:22.200
and it's within firm.

22:22.200 --> 22:25.560
And you may someday be
serving on a board.

22:25.560 --> 22:29.760
The thing you have to remember
is that a board member has --

22:29.760 --> 22:33.360
if you ever agree to serve on
a board, I think you should

22:33.360 --> 22:36.830
interpret it as a moral
obligation that you have taken

22:36.830 --> 22:41.440
on to prevent all of these
things, OK, and to make sure

22:41.440 --> 22:44.400
that the business is run
in a high-minded way.

22:44.400 --> 22:47.820
And remember that your
reputation is at stake,

22:47.820 --> 22:49.920
because you're part
of the company.

22:49.920 --> 22:51.520
But it's more than that,
it is a moral duty.

22:51.520 --> 22:53.720
So, you have what's
called the duty of

22:53.720 --> 22:56.010
care as a board member.

22:58.830 --> 23:04.700
Duty of care is a duty to act
as a reasonable, prudent,

23:04.700 --> 23:06.640
rational person would.

23:06.640 --> 23:09.780
That means you have to make sure
that you're getting the

23:09.780 --> 23:13.840
information, you're watching,
you're being careful about

23:13.840 --> 23:15.500
your obligation as
a board member.

23:15.500 --> 23:18.420
You are not managing
the company.

23:18.420 --> 23:21.560
You are watching the management
of the company.

23:21.560 --> 23:24.410
And you don't follow every
detail, but you have to follow

23:24.410 --> 23:27.990
enough that you act as
a sort of regulator.

23:27.990 --> 23:30.110
And you have to know
what you're doing.

23:30.110 --> 23:34.430
You also have a duty
of loyalty.

23:38.160 --> 23:41.130
And that's usually interpreted
as loyalty to the

23:41.130 --> 23:43.780
shareholders.

23:43.780 --> 23:46.880
I would say, it's expanding.

23:46.880 --> 23:51.010
Now, there's more and more
talk of corporate social

23:51.010 --> 23:53.990
responsibility, and the
loyalties that you have to

23:53.990 --> 23:57.880
other people, members of
the community at large.

23:57.880 --> 24:00.190
But I'd say that, let's just
start from the beginning,

24:00.190 --> 24:03.740
because there's so much
temptation to steal money, to

24:03.740 --> 24:07.080
tunnel money out of
corporations, it probably

24:07.080 --> 24:11.730
remains true that your main
duty of loyalty is to the

24:11.730 --> 24:13.750
actual shareholders.

24:13.750 --> 24:16.290
Because they're the ones who put
up the money, and they're

24:16.290 --> 24:18.300
expecting to get
a profit back.

24:21.470 --> 24:28.960
So, if you ever serve on a board
of directors, I think

24:28.960 --> 24:31.130
you may become --

24:31.130 --> 24:33.200
many board members don't
view it as a

24:33.200 --> 24:34.240
very significant thing.

24:34.240 --> 24:36.650
They think, well, this is just
an honor to be on the board,

24:36.650 --> 24:40.170
and I just show up at four
meetings a year.

24:40.170 --> 24:42.690
And we listen to a presentation
from the CEO, and

24:42.690 --> 24:44.510
we say fine.

24:44.510 --> 24:52.460
That's not what you
should be doing.

24:52.460 --> 24:55.440
I think one has to kind of
notice the ambience.

24:55.440 --> 24:58.280
You have to use your intuitive
judgment as a board member.

25:03.010 --> 25:05.170
Is this an up-and-up firm?

25:05.170 --> 25:13.140
Is there a good atmosphere
here?

25:16.830 --> 25:19.940
So, that was my first thing,
at the firm level.

25:23.920 --> 25:26.170
Of course, firms have compliance
departments.

25:28.800 --> 25:30.040
They issue rules.

25:30.040 --> 25:33.670
They issue statements
of purpose.

25:33.670 --> 25:37.920
And that's all within firm.

25:37.920 --> 25:42.070
But I wanted to move up now
another step in my regulatory

25:42.070 --> 25:46.150
thing, and move to
trade groups.

25:46.150 --> 25:54.170
And these are groups of firms
that get together to form an

25:54.170 --> 25:55.420
organization.

25:59.530 --> 26:01.470
Well, what did I say?

26:01.470 --> 26:05.370
Indra Nooyi was on
the U.S.-India --

26:05.370 --> 26:05.900
what was that?

26:05.900 --> 26:08.480
I don't remember
the exact name.

26:08.480 --> 26:09.880
It sounds like a trade group.

26:09.875 --> 26:14.105
A private group that deals with
businesses in both --

26:14.110 --> 26:16.710
U.S.-India Business Council.

26:16.710 --> 26:20.680
So apparently, business people
in both countries got together

26:20.680 --> 26:23.420
and formed an organization where
they discuss issues.

26:26.480 --> 26:30.590
And there may be a regulatory
function associated with them.

26:30.590 --> 26:34.760
But I wanted to start with an
example of a trade group, and

26:34.760 --> 26:40.580
that is the New York Stock
Exchange, because it's

26:40.580 --> 26:41.640
important in history.

26:41.640 --> 26:48.560
And it was founded in 1792.

26:48.560 --> 26:52.850
In 1792, stockbrokers
functioned, we had a stock

26:52.850 --> 26:55.680
market in the United States.

26:55.680 --> 26:57.160
Of course, it was a small one.

26:57.160 --> 27:01.060
The big stock markets
then were in Europe.

27:01.060 --> 27:06.530
But there was no organization
for the U.S. stock market.

27:06.530 --> 27:11.010
We had our first stock
market crash in 1792.

27:11.010 --> 27:13.580
The first American stock
market crash.

27:13.580 --> 27:19.340
And within two months, the
stockbrokers set up a trade

27:19.340 --> 27:22.090
organization, called the New
York Stock Exchange.

27:22.090 --> 27:30.450
And they met outdoors under
a buttonwood tree, so they

27:30.450 --> 27:33.240
signed a document called the
Buttonwood Agreement.

27:38.280 --> 27:40.860
Stockbrokers used to
work outdoors.

27:40.860 --> 27:44.690
Even into the 20th century, the
so-called American Stock

27:44.690 --> 27:48.060
Exchange used to be called
the Curb Exchange.

27:48.060 --> 27:50.310
That's because they were guys
who would stand on the curb

27:50.310 --> 27:52.670
outside of the New York Stock
Exchange, which had a

27:52.670 --> 27:54.860
building, and they would
just dicker among

27:54.860 --> 27:56.910
themselves and trade.

27:56.910 --> 27:59.120
Then, they decided they better
get a building, and that

27:59.120 --> 28:01.400
became the American Stock
Exchange, which doesn't exist

28:01.400 --> 28:04.400
anymore, it was absorbed by the
New York Stock Exchange

28:04.400 --> 28:06.150
eventually.

28:06.150 --> 28:09.770
But anyway, the stockbrokers in
New York got together under

28:09.770 --> 28:13.350
the buttonwood tree and signed
a historic agreement, setting

28:13.350 --> 28:15.380
up the stock exchange.

28:15.380 --> 28:22.450
And it's been described as an
idealistic document about our

28:22.450 --> 28:25.670
duties and our ethics.

28:25.670 --> 28:28.070
But I found, actually, the
text of the Buttonwood

28:28.070 --> 28:32.310
Agreement, and it's
really short.

28:32.310 --> 28:33.970
So, I will read it to you.

28:33.970 --> 28:38.090
I'll read you the whole
Buttonwood Agreement.

28:38.090 --> 28:42.840
"We, the subscribers, brokers
for the purchase and sale of

28:42.840 --> 28:47.660
the public stock, do hereby
solemnly promise and pledge

28:47.660 --> 28:52.150
ourselves, to each other, that
we will not buy or sell from

28:52.150 --> 28:56.570
this day, for any person
whatsoever, any kind of public

28:56.570 --> 29:02.010
stock at less than 1/4 of 1%
commission on the specie value

29:02.010 --> 29:06.200
of gold, that we will give
preference to each other in

29:06.200 --> 29:08.040
our negotiations." Period.

29:08.040 --> 29:12.260
"In testimony, we have set our
hands this day, 17th day of

29:12.260 --> 29:16.060
May, 1792, in New York."
That's the

29:16.060 --> 29:18.140
whole Buttonwood Agreement.

29:18.140 --> 29:21.600
It sounds like a price-fixing
agreement, doesn't it?

29:21.600 --> 29:25.430
And excluding other traders,
so it sounds like a cartel.

29:25.430 --> 29:28.280
I was wondering how I got the
impression that the Buttonwood

29:28.280 --> 29:30.970
Agreement was so idealistic.

29:30.970 --> 29:33.260
Where is the idealism there?

29:33.260 --> 29:34.820
So, I went and I looked
on the New York

29:34.820 --> 29:38.010
Stock Exchange website.

29:38.010 --> 29:40.940
And this is their interpretation
--

29:40.940 --> 29:42.770
it's on the website
right now --

29:42.770 --> 29:44.070
of the Buttonwood Agreement.

29:44.070 --> 29:47.620
It says there, "At the heart
of the Buttonwood Agreement

29:47.620 --> 29:49.240
was the need for fairness,

29:49.240 --> 29:52.280
responsibility, and trust." OK.

29:55.250 --> 29:58.790
I think, actually that might
not be as outrageous a

29:58.790 --> 30:01.080
self-serving claim as
you might think.

30:01.080 --> 30:06.460
Because what had happened in the
1792 stock market crash?

30:06.460 --> 30:11.900
There was one person who figured
very heavily in it.

30:11.900 --> 30:15.790
His name was William Duer.

30:18.626 --> 30:20.506
Am I spelling that right?

30:20.510 --> 30:22.990
It's E --

30:22.990 --> 30:25.490
no, it's U-E. Maybe that
was a u-Umlaut.

30:29.900 --> 30:34.570
William Duer, who was
a stock promoter.

30:34.570 --> 30:39.800
And he got a lot of people to
manage their money for him,

30:39.800 --> 30:44.040
and he got buying stocks on
margin, encouraged a lot of

30:44.040 --> 30:47.390
people to buy stocks
on margin.

30:47.390 --> 30:51.210
And it created a bubble
in the stock market,

30:51.210 --> 30:53.060
pushing prices up.

30:53.060 --> 30:57.440
Other people thought that Mr.
Duer was not a good character,

30:57.440 --> 31:03.070
but he managed to create a
bubble in the market, and it

31:03.070 --> 31:04.770
eventually collapsed.

31:04.770 --> 31:06.290
So, it was within two
months of that.

31:06.290 --> 31:08.390
Obviously, the stock exchange
was created in

31:08.390 --> 31:11.920
response to Mr. Duer.

31:11.920 --> 31:14.220
And so, what they're basically
saying is, we won't do

31:14.220 --> 31:15.640
business with this guy.

31:19.570 --> 31:20.840
We'll close him out.

31:20.840 --> 31:24.950
If we all agree that we won't
trade with him or people like

31:24.950 --> 31:27.390
that, then they'll be
out of the business.

31:27.390 --> 31:31.410
The other thing is putting a
minimum commission on sales.

31:31.410 --> 31:34.910
This is the profit they
get from the sale.

31:34.910 --> 31:40.300
It makes it into kind of a
gentlemen's organization,

31:40.300 --> 31:44.470
because they chose a commission,
which was

31:44.470 --> 31:47.060
sufficiently high, that they
could make substantial money

31:47.060 --> 31:48.380
trading stock.

31:48.380 --> 31:51.880
I think the philosophy
was, we are ethical

31:51.880 --> 31:55.380
members of the community.

31:55.380 --> 31:58.840
We don't want this business to
be turned over to discount

31:58.840 --> 32:01.530
brokers who don't care.

32:01.530 --> 32:05.020
And we will exercise
a duty of care.

32:05.020 --> 32:06.570
I wish, it said that
in the agreement.

32:06.570 --> 32:10.070
I'm reading between
the lines here.

32:10.070 --> 32:14.050
I think that probably was
part of the motivation.

32:14.050 --> 32:19.640
And so, we have to keep our
incomes up, so that good

32:19.640 --> 32:21.580
people can stay in
the business.

32:21.580 --> 32:22.840
That was the philosophy.

32:25.540 --> 32:28.110
And then later, the New York
Stock Exchange adopted many

32:28.110 --> 32:32.110
rules about ethical trading.

32:32.110 --> 32:35.270
And so, they were imposing
standards.

32:35.270 --> 32:37.000
It was just not explicit in the

32:37.000 --> 32:38.250
original Buttonwood Agreement.

32:44.230 --> 32:45.840
So, things changed recently.

32:45.840 --> 32:48.920
You know, our attitude
toward cartels has

32:48.920 --> 32:50.510
changed over the years.

32:50.510 --> 32:52.830
And there's a couple of
important dates that I wanted

32:52.830 --> 32:54.070
to emphasize.

32:54.070 --> 33:02.220
One of them is 1975,
and it's May Day.

33:02.220 --> 33:06.000
It was May 1, 1975.

33:06.000 --> 33:08.770
In the United States, the
government, under the

33:08.770 --> 33:15.540
Securities and Exchange
Commission, made fixed

33:15.540 --> 33:18.050
commissions illegal.

33:18.050 --> 33:23.140
Until 1975, the New York Stock
Exchange was still following

33:23.140 --> 33:25.720
something like those
1792 rules.

33:25.720 --> 33:33.470
Anyone who was a member of the
New York Stock Exchange had to

33:33.470 --> 33:36.310
impose a minimum commission.

33:36.310 --> 33:39.280
And then secondly, they could
only trade with each other,

33:39.280 --> 33:41.070
closing everybody else out.

33:41.070 --> 33:44.160
Now, they could justify that
because they're closing out

33:44.160 --> 33:45.470
the scoundrels.

33:45.470 --> 33:48.600
And so, that prevents a
race to the bottom.

33:48.600 --> 33:49.820
But it had another effect.

33:49.820 --> 33:52.990
It was creating monopoly
profits.

33:52.990 --> 33:57.480
And eventually the Securities
and Exchange

33:57.480 --> 34:03.240
Commission said, no more.

34:03.239 --> 34:06.169
We're going to have competitive
commissions.

34:06.170 --> 34:09.310
Any effort to fix commissions
in a trade group is now

34:09.310 --> 34:13.520
illegal, in '75.

34:13.520 --> 34:15.930
I think it's interesting, by the
way, that the chairman --

34:15.929 --> 34:17.529
this is a local interest --

34:17.530 --> 34:20.710
the chairman of the SEC, the
Securities and Exchange

34:20.710 --> 34:25.470
Commission, in '75 was Ray
Garrett, a Yale College

34:25.469 --> 34:29.599
graduate, and the President of
the United States was Gerald

34:29.600 --> 34:32.220
Ford, a Yale Law School
graduate.

34:32.219 --> 34:34.849
So, this had a local
beginning.

34:34.850 --> 34:41.290
But I wasn't lecturing about
finance in those days.

34:41.290 --> 34:47.710
Incidentally, 1975 is the
beginning of the National

34:47.710 --> 34:52.330
Market System, which
Congress created.

34:52.330 --> 34:55.080
So, this idea that you only
trade with other New York

34:55.080 --> 34:57.710
Stock Exchange brokers
was ended.

34:57.710 --> 35:00.920
Now brokers have an obligation
to find the best price for

35:00.920 --> 35:04.710
their customers on
any exchange.

35:04.710 --> 35:09.050
So, what the government really
did is, it broke the monopoly.

35:09.050 --> 35:11.410
And that's why the New
York Stock Exchange

35:11.410 --> 35:12.440
has faltered since.

35:12.440 --> 35:14.140
It has so many competitors
now.

35:14.140 --> 35:17.090
You've got all these
discount brokers.

35:17.090 --> 35:19.860
So, it hasn't done as well.

35:19.860 --> 35:23.040
If they haven't made these
changes in '75, it wouldn't

35:23.040 --> 35:23.680
have done as well [correction:
it wouldn't

35:23.684 --> 35:25.064
have faltered as much].

35:25.060 --> 35:29.260
Right now, it's about to be
taken over by the Deutsche

35:29.260 --> 35:32.790
Boerse, the German
stock exchange.

35:32.790 --> 35:34.230
That's still on,
I think, right?

35:34.230 --> 35:37.240
That deal?

35:37.240 --> 35:41.170
So, substantially,
it was a cartel.

35:41.170 --> 35:45.480
In the United Kingdom, it
took a little longer.

35:45.480 --> 35:54.130
But in 1986, when Margaret
Thatcher was prime minister,

35:54.130 --> 35:57.870
they had what's called
the Big Bang.

35:57.870 --> 36:00.570
That's the British counterpart
to May Day.

36:00.570 --> 36:02.590
They deregulated commissions.

36:02.590 --> 36:05.750
And again, it had
the same effect.

36:05.750 --> 36:08.210
It broke the monopoly.

36:11.560 --> 36:17.670
So, I could go on a lot about
trade groups, but I think we

36:17.670 --> 36:20.290
see some idea that --

36:20.290 --> 36:22.850
Incidentally, the New York Stock
Exchange, even today,

36:22.850 --> 36:28.300
has its own market surveillance
unit that looks,

36:28.300 --> 36:30.300
it goes through trading records
and it looks for

36:30.300 --> 36:33.830
examples of, say,
manipulation.

36:33.830 --> 36:37.360
And they will track down and
find you, if they think that

36:37.360 --> 36:41.670
something immoral was done.

36:41.670 --> 36:46.050
So, even though they had
a deregulation of their

36:46.050 --> 36:49.880
commission, they still
are doing that.

36:49.880 --> 36:53.540
You know, this idea about
allowing groups to regulate

36:53.540 --> 36:56.400
prices is controversial.

36:56.400 --> 37:01.600
Airlines used to have their
fares regulated by the --

37:06.270 --> 37:09.710
what's the U.S. government
agency?

37:09.710 --> 37:16.210
The airline fares were regulated
at high levels.

37:16.210 --> 37:19.900
And in those days, airplanes
would give you great service,

37:19.900 --> 37:26.320
because they were competing on
service rather than on fares.

37:26.320 --> 37:28.410
So, it used to be that when
you got an airplane, there

37:28.410 --> 37:30.980
were a lot of empty seats,
because they were scheduling

37:30.980 --> 37:33.510
many more flights than needed.

37:33.510 --> 37:36.060
And you got great meals.

37:36.060 --> 37:38.510
But it was expensive.

37:38.510 --> 37:43.040
And so, if they deregulate,
fares come way down.

37:43.040 --> 37:46.850
Services, now you're jammed in
shoulder to shoulder, and if

37:46.850 --> 37:49.110
you don't like that,
you can pay more.

37:49.110 --> 37:50.920
But very few people
will pay more.

37:53.600 --> 37:56.050
I think, on balance, it's a
good thing to deregulate

37:56.050 --> 37:56.460
commissions.

37:56.460 --> 37:59.920
And now we have all these
websites now that sell on very

37:59.920 --> 38:00.530
low commissions.

38:00.530 --> 38:04.070
It's a product of
deregulation.

38:04.070 --> 38:06.430
I mean, a product of regulation,
I'm sorry,

38:06.430 --> 38:11.830
regulation that prevents the
cartels from forming and

38:11.830 --> 38:17.590
closing out competitors who
might charge a lower rate.

38:17.590 --> 38:25.510
So, the third thing I said
about local regulation.

38:25.510 --> 38:28.290
This is my third category.

38:28.290 --> 38:33.950
It used to be that it was
a more local phenomenon.

38:33.950 --> 38:37.030
I'm particularly thinking of the
United States, but I think

38:37.030 --> 38:38.760
it was true elsewhere as well.

38:38.760 --> 38:42.240
Local banks would be regulated
locally by the people who saw

38:42.240 --> 38:44.850
them rather than a distant
national government.

38:47.760 --> 38:53.950
In the United States, until
the 1930's, financial

38:53.950 --> 38:57.370
regulation was almost
exclusively local.

38:57.366 --> 39:01.956
The federal government
didn't do anything.

39:01.960 --> 39:10.090
So, we had a bunch of laws
called Blue Sky laws, that

39:10.090 --> 39:15.630
were put in place by state
governments during the

39:15.630 --> 39:16.590
progressive era.

39:16.590 --> 39:20.750
The progressive era was from
the 1890's to the 1920's.

39:20.750 --> 39:24.890
That was an era in U.S. history
when a lot of state

39:24.890 --> 39:26.770
governments started adding
regulations.

39:26.770 --> 39:32.170
They did other things like
regulate food safety and other

39:32.170 --> 39:33.600
business laws.

39:33.600 --> 39:37.490
But regarding finance, it
was the Blue Sky laws.

39:37.490 --> 39:39.850
Now, I don't know if anyone
remembers why they're called

39:39.850 --> 39:44.060
Blue Sky laws, but one
interpretation is, that there

39:44.060 --> 39:46.760
were a lot of sales people
for investments.

39:46.760 --> 39:51.620
And some of them would give you
an exaggerated sales job.

39:51.620 --> 39:56.560
They would say, there's no limit
to how high the price

39:56.560 --> 40:00.500
can go of this stock, nothing
but the blue sky above.

40:00.500 --> 40:04.130
So, that's my story about how
they got to be called Blue Sky

40:04.130 --> 40:06.460
laws, but I don't know if
there's any agreement on where

40:06.460 --> 40:07.710
that name came from.

40:11.050 --> 40:16.560
And I think the first Blue
Sky law was in the state

40:16.560 --> 40:25.230
of Kansas in 1911.

40:25.230 --> 40:31.940
It was given some impetus by
a book written by William

40:31.940 --> 40:44.730
Brandeis, called Other People's
Money in 1914, I

40:44.730 --> 40:45.580
think it was.

40:45.580 --> 41:02.240
That was a book that detailed
the scandals of fake

41:02.240 --> 41:09.500
securities, or dishonest
promoters of securities.

41:09.500 --> 41:14.210
So, it started in Kansas in
1911, but by the 1930's

41:14.210 --> 41:18.800
practically every state had Blue
Sky laws, and they had

41:18.800 --> 41:20.890
state regulators that
enforced them.

41:23.950 --> 41:28.140
But the problem was, that they
were state laws, and it made

41:28.140 --> 41:30.920
it difficult for state
governments.

41:30.920 --> 41:33.010
Because all these different
state governments are trying

41:33.010 --> 41:36.190
to regulate an industry, which
is really national or

41:36.190 --> 41:38.190
international in scope.

41:38.190 --> 41:41.790
The people could evade the Blue
Sky laws, now especially

41:41.790 --> 41:45.290
since the telephone became
prominent in the 1920's.

41:45.290 --> 41:48.610
You could set up a boiler room,
so-called, in one state.

41:48.610 --> 41:51.010
A boiler room, I think
I said this, is a --

41:51.010 --> 41:55.470
you rent the cheapest space for
your telephone bank, and

41:55.470 --> 41:59.250
you pick the boiler room in the
basement of some building,

41:59.250 --> 42:02.350
and you put a bunch of people
manning the telephones.

42:02.350 --> 42:06.400
And they call across state
lines, so this confuses the

42:06.400 --> 42:09.110
Blue Sky regulators,
because it involves

42:09.110 --> 42:10.550
two different states.

42:10.550 --> 42:12.840
And you called long distance
to the other state

42:12.840 --> 42:13.950
and you give --

42:13.950 --> 42:15.910
this used to happen a lot,
it doesn't happen so

42:15.910 --> 42:17.340
much anymore --

42:17.340 --> 42:18.970
they would try to sell
you on something.

42:18.970 --> 42:20.280
I've got a great stock.

42:20.280 --> 42:22.800
It's going to triple
in five days.

42:22.800 --> 42:26.090
If you don't buy it today,
it's too late.

42:26.090 --> 42:27.630
And they would get people
into stocks that

42:27.630 --> 42:29.200
were utterly worthless.

42:29.200 --> 42:30.450
And it was fraud.

42:35.500 --> 42:42.360
The whole progressive movement
to regulate securities was of

42:42.360 --> 42:43.940
limited success.

42:43.940 --> 42:48.830
But it left in place a huge
state and local regulatory

42:48.830 --> 42:53.550
system, that was considered
inadequate to the task, but

42:53.550 --> 42:56.220
which remains today for the

42:56.220 --> 43:00.070
regulation of smaller companies.

43:00.070 --> 43:06.380
The next step is the national
regulation, which occurred in

43:06.380 --> 43:13.420
the United States in the 1930's
under the New Deal of

43:13.420 --> 43:15.180
President Roosevelt.

43:15.176 --> 43:16.426
So 4, national.

43:20.420 --> 43:25.230
Notably, in 1934, I mentioned
this before, the U.S.

43:25.230 --> 43:26.880
government set up the --

43:26.880 --> 43:28.030
it's actually, we
spell it out --

43:28.030 --> 43:44.890
Securities and Exchange
Commission, or SEC, which

43:44.890 --> 43:49.690
regulates the larger firms.
Practically, you know, any

43:49.690 --> 43:52.600
firm that's listed on a stock
exchange would be

43:52.600 --> 43:53.850
regulated by them.

43:58.530 --> 44:08.640
One of the first directors
of the SEC was William O.

44:08.640 --> 44:17.370
Douglas, a Yale Law Professor,
who wrote a book, called

44:17.370 --> 44:20.840
Democracy and Finance,
about his

44:20.840 --> 44:24.450
experience as SEC director.

44:24.450 --> 44:33.380
And he talked about the
conflicts he had with Wall

44:33.375 --> 44:34.995
Street at the time.

44:35.000 --> 44:37.630
They really didn't like
this regulation.

44:37.630 --> 44:41.570
It was an antagonistic
atmosphere.

44:41.570 --> 44:45.260
The Securities and Exchange
Commission was widely regarded

44:45.260 --> 44:48.670
in the business community as
practically a socialist

44:48.670 --> 44:49.850
organization --

44:49.850 --> 44:52.840
and that's a dirty word in
the United States --

44:52.840 --> 44:55.390
because it seemed like the
government was involving

44:55.390 --> 44:59.180
itself in things that they
had no business involving

44:59.180 --> 45:00.610
themselves in.

45:00.610 --> 45:05.010
So, Douglas fought kind of a
battle against Wall Street, as

45:05.010 --> 45:06.980
detailed in his book.

45:06.980 --> 45:11.580
But to get everything on an
up-and-up format, he was

45:11.580 --> 45:13.510
following one of the rules
that Brandeis --

45:16.430 --> 45:20.080
He wanted disclosure.

45:20.080 --> 45:23.260
Louis Brandeis, there's a famous
quote in his book Other

45:23.260 --> 45:27.690
People's Money, and it is,
quote, "Sunshine is the best

45:27.690 --> 45:31.470
disinfectant." That's a parable
to hanging out your

45:31.470 --> 45:35.190
clothes on the clothesline and
letting the sunlight fall on

45:35.190 --> 45:37.630
them, and that disinfects
them.

45:37.630 --> 45:40.310
But the same idea applies
in finance.

45:40.310 --> 45:44.860
That if everybody knows what
the firm is doing, they'll

45:44.860 --> 45:46.960
figure it out and there'll
be talk.

45:46.960 --> 45:51.590
We just don't want firms
to keep secrets.

45:51.590 --> 45:55.890
So, the SEC is built
around disclosure.

45:55.890 --> 46:06.170
And so, I mentioned, EDGAR is
their online information

46:06.170 --> 46:12.370
system, and it's on sec.gov.
They put everything up about a

46:12.370 --> 46:17.180
company, of any public company,
up on that website.

46:17.180 --> 46:21.650
And it's free, absolutely
free to the world.

46:21.650 --> 46:26.040
That's disclosure, and that
was the motivating thing.

46:26.040 --> 46:31.260
Another SEC chairman
was Arthur Levitt.

46:35.340 --> 46:39.920
And he wrote a book, called Take
on the Street, after he

46:39.920 --> 46:42.900
left the SEC chairmanship.

46:42.900 --> 46:45.120
This was recently.

46:45.120 --> 46:48.150
I mean, like in the
last 10 years.

46:48.150 --> 46:54.560
And he told a lot of
stories about nasty

46:54.560 --> 46:57.860
people on Wall Street.

46:57.860 --> 47:02.600
He said, he had vivid memories
of the reactions he got from

47:02.600 --> 47:06.050
proposing new regulations.

47:06.050 --> 47:11.870
And he was particularly upset by
the, kind of, ability that

47:11.870 --> 47:16.340
Wall Street had to fool people
by using complex language that

47:16.340 --> 47:17.440
they couldn't understand.

47:17.440 --> 47:20.250
They would write prospectuses
that no one could understand

47:20.250 --> 47:21.840
without a law degree.

47:21.840 --> 47:24.270
He wanted plain English.

47:24.270 --> 47:29.900
So again, taking a job as SEC
chairman, or commissioner on

47:29.900 --> 47:39.650
the SEC, is taking on a
high-tension job, I think.

47:39.650 --> 47:42.300
But it's just like the same
thing as in sports.

47:42.300 --> 47:45.510
You know how referees in sports
get punched every now

47:45.510 --> 47:48.330
and then by the athletes.

47:48.330 --> 47:50.960
But we all see that
they're necessary.

47:55.190 --> 48:01.090
So, one thing that the SEC
does is, protect small

48:01.090 --> 48:04.320
investors by managing
the distinction --

48:04.320 --> 48:06.050
I mentioned this before --

48:06.050 --> 48:08.500
between public and private
securities.

48:08.500 --> 48:18.490
So, if you want to go public and
list your security, or the

48:18.490 --> 48:22.490
shares of your company, on a
stock exchange, you have to go

48:22.490 --> 48:27.060
through a procedure defined
by the SEC, called an IPO.

48:29.610 --> 48:33.000
That stands for initial
public offering.

48:33.000 --> 48:37.550
And to do that procedure, you
have to follow a system of

48:37.550 --> 48:43.200
rules, dictated by the SEC, that
makes it difficult for

48:43.200 --> 48:46.830
you to do any shenanigans,
any tricks.

48:46.830 --> 48:50.450
It creates a level
playing field.

48:50.450 --> 48:55.170
And the rules are very strict
and enforced by the SEC.

48:57.680 --> 49:06.300
The SEC allows other companies
to remain private, but it has

49:06.300 --> 49:09.520
rules about what you have
to do to stay private.

49:12.140 --> 49:16.150
When you become a public
company, you are involved in

49:16.150 --> 49:23.760
the public trust. And you have
to, among other things,

49:23.760 --> 49:30.610
include all of your documents on
sec.gov. But they do allow

49:30.610 --> 49:32.330
private companies.

49:32.330 --> 49:36.950
And a particularly important
category of private company is

49:36.950 --> 49:38.380
the so-called hedge fund.

49:42.070 --> 49:48.290
A hedge fund is an investment
company for wealthy

49:48.290 --> 49:49.880
individuals only.

49:52.700 --> 49:58.630
And the idea is that small
investors need to be

49:58.630 --> 50:02.090
protected, because
they don't know.

50:02.090 --> 50:06.250
They don't have expensive
advisors and lawyers to tell

50:06.250 --> 50:07.410
them what to do.

50:07.405 --> 50:14.775
And so, lots of controversial
things can't be done in funds

50:14.780 --> 50:17.290
that are offered
to the public.

50:17.286 --> 50:22.686
A hedge fund is a fund for these
wealthy investors, and

50:22.690 --> 50:28.440
the SEC has minimal regulation
of them.

50:28.440 --> 50:30.850
The Dodd-Frank bill, we thought,
would put more

50:30.850 --> 50:34.830
regulation on them, but they're
still surviving as

50:34.830 --> 50:37.950
largely unregulated
organizations.

50:45.710 --> 50:49.300
The law, the SEC code of
rules, is huge and is

50:49.300 --> 50:49.850
complicated.

50:49.850 --> 50:58.370
I guess, you can read about it
on sec.gov. But there's a 3C1S

50:58.370 --> 51:02.690
hedge fund, it's one type of
hedge fund, it can take on no

51:02.690 --> 51:04.500
more than 99 investors.

51:04.500 --> 51:08.420
It can't be more than 100.

51:08.420 --> 51:11.520
And they must be accredited
investors.

51:14.520 --> 51:17.630
And the SEC defines accredited
investors.

51:22.560 --> 51:25.080
They were proposing to change
the definition, but I think it

51:25.080 --> 51:25.940
still stuck.

51:25.940 --> 51:27.960
To be an accredited
investor --

51:27.960 --> 51:29.210
I don't have it here --

51:31.480 --> 51:36.070
I think it's still that you had
to have an income of at

51:36.070 --> 51:39.730
least $200,000 a year if you're
single, or $300,000 if

51:39.730 --> 51:45.360
you're married, or $1 million
in investable assets not

51:45.360 --> 51:46.740
including your house.

51:46.740 --> 51:48.310
I think that's the definition.

51:48.310 --> 51:50.190
I've got it fairly close.

51:50.190 --> 51:51.470
So, it excludes most
investors.

51:54.150 --> 51:56.480
But then, there's others
kinds of hedge funds.

51:56.480 --> 52:03.340
There's also a 3C7S hedge fund,
that's allowed to take

52:03.340 --> 52:10.970
on 500 investors.

52:10.970 --> 52:19.500
But these have to have a net
worth of $5 million, or if

52:19.500 --> 52:22.920
they're an institution it can't
be a little institution.

52:22.920 --> 52:25.870
So, it would be $5 million.

52:25.865 --> 52:27.875
So, it's more than an accredited
investor, it's

52:27.880 --> 52:30.220
called super-accredited.

52:30.220 --> 52:34.830
$5 million for individuals, $25
million for institutions.

52:38.210 --> 52:41.040
That excludes most family
foundations, I suspect.

52:43.850 --> 52:49.550
So, hedge funds you don't hear
about as much, because they

52:49.550 --> 52:51.150
don't advertise.

52:51.150 --> 52:53.820
And they are not allowed
to advertise.

52:53.820 --> 52:58.850
If you click on their website,
they'll have a website, it

52:58.850 --> 53:01.990
will give you the contact
information, typically, and

53:01.990 --> 53:04.240
say very little more
about them.

53:04.240 --> 53:07.220
They don't put anything on their
website, because they

53:07.220 --> 53:10.530
worry that they'd run afoul of
the SEC, that the SEC would

53:10.530 --> 53:12.400
call it advertising.

53:12.400 --> 53:16.410
And you're not supposed
to be for the public.

53:16.410 --> 53:17.800
This creates some conflict.

53:17.800 --> 53:21.720
Some people think, why is it
that the United States has

53:21.720 --> 53:23.650
this kind of two-tier system?

53:23.646 --> 53:25.766
It's not just the United States,
other countries have

53:25.770 --> 53:27.150
this as well.

53:27.150 --> 53:28.690
But let's talk about
this system.

53:28.690 --> 53:33.590
Why is it that we have special
rules for poor people, which

53:33.590 --> 53:37.170
in effect, in their estimation,
excludes them from

53:37.170 --> 53:39.630
some of the biggest profit
opportunities?

53:39.630 --> 53:45.530
Hedge funds are allowed to
impose high management fees.

53:45.530 --> 53:50.640
And the typical management fee
has been called ''two and

53:50.640 --> 53:58.430
20.'' 2% of the assets under
management goes to the

53:58.430 --> 54:01.090
managers every year.

54:01.090 --> 54:04.810
And 20% of any profit,
trading profits they

54:04.810 --> 54:07.500
make, go to the managers.

54:07.500 --> 54:09.250
Nothing of their
trading losses.

54:09.250 --> 54:12.420
If they lose money, it doesn't
come from the managers.

54:12.420 --> 54:14.990
Now, that sounds like a really
good deal, right?

54:14.990 --> 54:16.330
Think about it.

54:16.330 --> 54:19.750
If you can raise just $1 billion
in your management

54:19.750 --> 54:21.630
fund, you're getting 2%.

54:21.630 --> 54:23.270
What is 2% of $1 billion?

54:23.270 --> 54:24.150
It's $20 million?

54:24.145 --> 54:26.785
Did I get that right?

54:26.790 --> 54:28.620
And 20% of the profits.

54:28.620 --> 54:31.570
I mean, you're going to make a
huge amount of money, right?

54:31.570 --> 54:33.630
I suspect some of you
will do this,

54:33.630 --> 54:35.600
because it's so tempting.

54:35.600 --> 54:37.460
But of course, you
can't do this.

54:37.460 --> 54:40.300
It's not so easy to start a
hedge fund, because the whole

54:40.300 --> 54:42.840
idea of a hedge fund in most
people's minds is, there are

54:42.840 --> 54:46.820
genius traders, and you have
got to pay them, right?

54:46.820 --> 54:50.710
You can't hire them cheap.

54:50.710 --> 54:53.730
So, the hedge funds raid all
of the geniuses out of the

54:53.730 --> 54:56.750
mutual funds, which are public
investment companies for these

54:56.750 --> 54:57.900
retail investors.

54:57.900 --> 55:03.310
They get the smartest guys and
pay them this huge amount, and

55:03.310 --> 55:07.380
the idea is, they'll make
a lot of money.

55:07.380 --> 55:10.320
Whether they really do
make a lot of money

55:10.320 --> 55:13.730
is a difficult question.

55:13.730 --> 55:15.720
It's hard to tell, because
hedge funds

55:15.720 --> 55:16.740
haven't been around.

55:16.740 --> 55:19.730
They're changing through time.

55:19.730 --> 55:22.020
I'm sure some of them do
make a lot of money.

55:22.020 --> 55:23.270
Some of them are good
investments.

55:25.990 --> 55:29.580
But it's like a wild west.
It's a jungle out there.

55:29.580 --> 55:33.040
And the SEC doesn't think that
you, the small investor,

55:33.040 --> 55:34.740
should get involved in that.

55:34.740 --> 55:37.080
And so you won't.

55:37.080 --> 55:39.820
That's another example.

55:39.820 --> 55:48.070
So, market surveillance is
something that the SEC does,

55:48.065 --> 55:53.525
and it does it in connection
with the self-regulatory

55:53.530 --> 55:57.370
organizations like the
stock exchanges.

55:57.370 --> 55:59.860
It's, again, trying to prevent
manipulative behavior.

56:13.720 --> 56:15.760
See, the markets don't
function that well by

56:15.760 --> 56:19.300
themselves without some
kind of referee.

56:19.300 --> 56:26.700
The 1792 stock market crash
was only one example, but

56:26.700 --> 56:30.250
market surveillance is now a
well-established principle to

56:30.250 --> 56:34.230
prevent manipulators from
taking over a market.

56:34.230 --> 56:38.840
I'll give you an example of what
happens, and this is a

56:38.840 --> 56:42.240
news story from 1995.

56:42.240 --> 56:49.380
In May 1995, a secretary at IBM
Corporation was asked to

56:49.380 --> 56:54.090
copy documents related to secret
plans to take over the

56:54.090 --> 56:55.560
Lotus Corporation.

56:55.560 --> 56:57.120
Lotus was this spreadsheet --

56:57.120 --> 56:58.880
it doesn't exist anymore --

56:58.880 --> 57:03.590
spreadsheet company that was
a pioneer in computer

57:03.590 --> 57:04.900
spreadsheets.

57:04.900 --> 57:07.420
So anyway, she just commented
to her husband, because she

57:07.420 --> 57:11.180
was copying these documents, she
said, oh, IBM is going to

57:11.180 --> 57:13.610
take over Lotus.

57:13.610 --> 57:18.490
Her husband saw that as
valuable information.

57:18.490 --> 57:20.930
The stock price of Lotus
is likely to go up.

57:20.930 --> 57:25.080
And she said that they were
going to do it in three days.

57:25.080 --> 57:26.590
So, that's a perfect thing.

57:26.590 --> 57:29.190
So, what did he do?

57:29.190 --> 57:33.740
He merely telephoned all of
his friends and told them.

57:33.740 --> 57:38.380
By the takeover date, 25 people
had bought a half

57:38.380 --> 57:40.200
million dollars.

57:40.200 --> 57:44.050
These people included a pizza
chef, an electrical engineer,

57:44.050 --> 57:48.490
a bank executive, a dairy
wholesaler, a schoolteacher,

57:48.490 --> 57:51.720
and four stockbrokers.

57:51.720 --> 57:55.290
Well, they caught them, because
they saw this unusual

57:55.290 --> 58:03.770
activity in the stock, and they
subpoenaed their phone

58:03.770 --> 58:05.710
records and they figured out
who called whom, and they

58:05.710 --> 58:11.040
called them in and made them
declare what they'd done, and

58:11.040 --> 58:12.920
they were all punished
for this.

58:12.920 --> 58:13.840
It's illegal.

58:13.840 --> 58:16.410
You can't trade on inside
information.

58:16.410 --> 58:20.060
Again, the SEC is trying to
create a level playing field

58:20.060 --> 58:21.480
for everyone.

58:21.480 --> 58:22.730
I'll give you another example.

58:27.860 --> 58:30.540
It was Emulex Corporation.

58:30.540 --> 58:38.500
A former employee of this
company shorted stock in his

58:38.500 --> 58:41.320
own former company.

58:41.320 --> 58:44.760
And he then decided he would
try to help make

58:44.760 --> 58:48.060
the price go down.

58:48.060 --> 58:50.850
So he sent -- because he knew
the company; he knew

58:50.850 --> 58:52.290
how to do this --

58:52.290 --> 58:56.590
he sent a fake press release
to the internet.

58:56.590 --> 59:00.530
And nobody suspected it,
because it looked real.

59:00.530 --> 59:03.880
He just sent it out from
his own computer.

59:03.880 --> 59:05.580
Actually, it wasn't
his own computer.

59:05.580 --> 59:07.200
He thought, he was
being smart.

59:07.200 --> 59:10.620
He went to the El Camino
Community College library.

59:10.617 --> 59:12.047
STUDENT: Yes.

59:12.050 --> 59:13.670
PROFESSOR ROBERT SHILLER:
You know the story.

59:13.665 --> 59:14.995
STUDENT: I know the college.

59:15.000 --> 59:17.100
PROFESSOR ROBERT SHILLER: Oh,
you know the college.

59:17.100 --> 59:19.910
Well, he went to the library,
and he sent the press release

59:19.910 --> 59:21.930
from the library's computer.

59:21.932 --> 59:24.052
And he thought, that's
going to be sure.

59:24.050 --> 59:26.750
And then it worked.

59:26.750 --> 59:30.590
It was picked up by all the news
services, the bad news

59:30.590 --> 59:31.900
about Emulex.

59:31.900 --> 59:34.770
And then, he immediately covered
his short position,

59:34.770 --> 59:36.510
and he made a big profit.

59:36.510 --> 59:38.950
And he thought, he was smart,
but he wasn't smart enough for

59:38.950 --> 59:41.820
the surveillance.

59:41.820 --> 59:46.170
Because they suspected.

59:46.170 --> 59:50.870
Well, immediately, Emulex
immediately protested, we

59:50.870 --> 59:53.120
didn't send out this
press release.

59:53.120 --> 59:57.280
So, the market surveillance
team went into action.

59:57.280 --> 59:58.800
And they found out.

59:58.800 --> 1:00:01.100
It's all in the stock exchange
record, who covered a short

1:00:01.100 --> 1:00:04.300
position right after
the announcement.

1:00:04.300 --> 1:00:07.470
They got his name as
one of the people.

1:00:07.470 --> 1:00:12.090
They actually traced down where
the email was sent from,

1:00:12.090 --> 1:00:15.750
and they went to El Camino
Community College, and they

1:00:15.750 --> 1:00:18.930
talked to the librarians, and
they showed them photographs.

1:00:18.930 --> 1:00:22.320
And they remembered him, and
so they nailed this guy.

1:00:22.320 --> 1:00:27.720
So that's an example of what
happens in our markets.

1:00:27.720 --> 1:00:29.580
And so that makes things
work well.

1:00:34.710 --> 1:00:41.360
I also wanted to mention, what
the SEC does with creating

1:00:41.360 --> 1:00:45.940
private organizations, or
self-regulatory organizations,

1:00:45.940 --> 1:00:47.980
that do some of its jobs.

1:00:47.980 --> 1:00:54.470
So, we have something called
FASB, which is called the

1:00:54.470 --> 1:00:58.510
Financial Accounting
Standards Board.

1:00:58.510 --> 1:01:00.690
It's right here in
Connecticut.

1:01:00.690 --> 1:01:05.620
The SEC decided that companies
fake their

1:01:05.620 --> 1:01:07.680
books in too many ways.

1:01:07.680 --> 1:01:11.640
There's too much funny business
going on, and we need

1:01:11.640 --> 1:01:13.870
to manage this better.

1:01:13.870 --> 1:01:17.430
But they didn't want to take
over completely this as a

1:01:17.430 --> 1:01:18.910
government function.

1:01:18.910 --> 1:01:33.580
So, the government recognized an
industry group called FASB

1:01:33.580 --> 1:01:36.600
as the arbiter of accounting
standards.

1:01:36.600 --> 1:01:41.700
And FASB is the authority
that defines

1:01:41.700 --> 1:01:43.800
GAAP accounting standards.

1:01:43.800 --> 1:01:48.080
And GAAP is an acronym
for Generally

1:01:48.080 --> 1:01:52.070
Accepted Accounting Practices.

1:01:52.070 --> 1:01:54.110
I'm sorry, Principles.

1:01:54.110 --> 1:01:58.640
Generally Accepted Accounting
Principles are defined by a

1:01:58.640 --> 1:02:00.030
private group.

1:02:00.030 --> 1:02:04.930
And these principles are used on
EDGAR, which is the website

1:02:04.930 --> 1:02:09.570
that the SEC uses to
present accounting.

1:02:09.570 --> 1:02:11.550
So, they're in Norwalk,
Connecticut, and they have

1:02:11.550 --> 1:02:17.510
their own website, and
you can see how they

1:02:17.510 --> 1:02:20.240
define accounting standards.

1:02:20.240 --> 1:02:22.040
I'm running out of time here.

1:02:22.040 --> 1:02:28.900
I wanted to tell you about
another government agency

1:02:28.900 --> 1:02:30.150
called SIPC.

1:02:32.920 --> 1:02:34.650
I'm just having too much
fun telling you

1:02:34.650 --> 1:02:37.010
about all of these.

1:02:37.010 --> 1:02:42.810
SIPC is the Securities
Investor Protection

1:02:42.810 --> 1:02:45.740
Corporation, created
by the United

1:02:45.740 --> 1:02:50.890
States Congress in 1970.

1:02:50.890 --> 1:02:55.570
And it's part of an effort to
protect small investors.

1:02:55.570 --> 1:03:02.720
SIPC insures your brokerage
accounts against losses due to

1:03:02.720 --> 1:03:05.980
failure of your stockbroker.

1:03:05.980 --> 1:03:09.070
It corresponds to the FDIC.

1:03:12.165 --> 1:03:14.405
Did I mention this before?

1:03:14.410 --> 1:03:16.040
Maybe, I mentioned it briefly.

1:03:16.040 --> 1:03:21.780
The FDIC is the company that
insures your bank account.

1:03:21.780 --> 1:03:24.730
SIPC is the company that
insures your brokerage

1:03:24.730 --> 1:03:29.190
account, and it's a government
corporation.

1:03:29.190 --> 1:03:31.430
It has limits on the amount
that it insures.

1:03:36.520 --> 1:03:41.300
It was actually created in 1970,
in response -- a lot of

1:03:41.300 --> 1:03:43.480
things happen in response
to a crisis --

1:03:43.480 --> 1:03:50.080
There was a brokerage firm
called Goodbody that failed in

1:03:50.080 --> 1:03:53.810
1970, just before SIPC
was created.

1:03:53.810 --> 1:03:56.970
A lot of people had their stocks
in Goodbody, and they

1:03:56.970 --> 1:04:00.600
had accounts there, and it
looked like they were

1:04:00.600 --> 1:04:01.580
going to lose it.

1:04:01.580 --> 1:04:03.870
They held their stocks in street
name, and I remember

1:04:03.870 --> 1:04:05.280
telling you about that.

1:04:05.280 --> 1:04:07.690
So, they thought they owned
shares, but really Goodbody

1:04:07.690 --> 1:04:09.010
owned the shares,
or they thought

1:04:09.010 --> 1:04:10.620
Goodbody owned the shares.

1:04:10.620 --> 1:04:14.840
But Goodbody went under, so they
ran the risk of losing

1:04:14.840 --> 1:04:17.640
the shares they thought
they owned.

1:04:17.640 --> 1:04:22.310
So, SIPC was created in
order to prevent that.

1:04:25.520 --> 1:04:29.910
Continuing along on the
national level.

1:04:29.910 --> 1:04:33.500
Regulation is getting stronger
at the national level.

1:04:33.500 --> 1:04:36.450
I'll talk about two examples in
the U.S. And I'm going to

1:04:36.450 --> 1:04:40.450
talk about the European Union
as if it were a nation.

1:04:40.450 --> 1:04:41.860
It sort of is a nation.

1:04:41.860 --> 1:04:45.150
It's an assembly of nations,
but it's kind of halfway

1:04:45.150 --> 1:04:46.610
between national and
international.

1:04:46.610 --> 1:04:51.050
But I'll start with the U.S. I
mentioned that in the 1930's

1:04:51.050 --> 1:04:54.820
there was a big step up in
regulation with the New Deal,

1:04:54.820 --> 1:04:57.860
creating the Securities and
Exchange Commission.

1:04:57.860 --> 1:05:02.620
The next big regulatory push in
the United States occurred

1:05:02.620 --> 1:05:09.470
last year, in 2010.

1:05:09.470 --> 1:05:11.580
We had the Dodd-Frank Act.

1:05:16.300 --> 1:05:18.130
Christopher Dodd is our own --

1:05:18.130 --> 1:05:20.890
was our own senator
from Connecticut.

1:05:20.890 --> 1:05:24.390
And Barney Frank is
chair of the House

1:05:24.390 --> 1:05:26.770
Financial Services Committee.

1:05:26.770 --> 1:05:29.200
I'll just give you a couple
of things from the act.

1:05:33.410 --> 1:05:37.460
The act is really trying to push
regulation more to the

1:05:37.460 --> 1:05:40.570
macroprudential from the
microprudential.

1:05:40.570 --> 1:05:43.700
All this thing about fraudulent
activities that

1:05:43.700 --> 1:05:49.290
milk innocent individuals,
that was taken care of by

1:05:49.290 --> 1:05:50.690
previous legislation.

1:05:50.690 --> 1:05:52.910
Well, not all of it,
some of it was.

1:05:52.910 --> 1:05:59.640
But Dodd-Frank creates the
Financial Stability Oversight

1:05:59.640 --> 1:06:02.210
Council, or FSOC.

1:06:02.210 --> 1:06:05.900
The Financial Stability
Oversight Council is designed

1:06:05.900 --> 1:06:09.840
to worry about ''too big to
fail.'' They are the regulator

1:06:09.840 --> 1:06:13.780
that deals with systemic risk.

1:06:13.780 --> 1:06:21.140
That is, risk that affects
the whole system.

1:06:21.140 --> 1:06:25.850
They're regulating not just to
protect the individual from

1:06:25.850 --> 1:06:29.870
bad activities, or from being
fooled, but also to protect

1:06:29.870 --> 1:06:31.120
the whole system.

1:06:31.120 --> 1:06:32.460
So that's part of Dodd-Frank.

1:06:32.460 --> 1:06:37.560
The other part I was going to
mention is the consumer --

1:06:37.560 --> 1:06:38.300
I see it two ways.

1:06:38.300 --> 1:06:42.020
Bureau of Consumer Financial
Protection, or Consumer

1:06:42.020 --> 1:06:44.550
Financial Protection Bureau, so
I'm not sure how to write

1:06:44.550 --> 1:06:45.050
the acronym.

1:06:45.050 --> 1:06:49.140
It hasn't actually
taken form yet.

1:06:49.140 --> 1:06:54.200
I'll say Bureau of Consumer
Financial Protection.

1:06:54.200 --> 1:07:00.780
This one is a microprudential
regulation.

1:07:00.780 --> 1:07:04.630
I mentioned her before, I
think, Elizabeth Warren

1:07:04.630 --> 1:07:06.750
proposed it.

1:07:06.750 --> 1:07:10.090
She's a Harvard Law professor.

1:07:10.090 --> 1:07:13.780
And what it's going to do is
have a government agency that

1:07:13.780 --> 1:07:19.750
is focused on protecting small
investors, or borrowers in the

1:07:19.750 --> 1:07:21.550
mortgage market or the like.

1:07:21.550 --> 1:07:23.650
STUDENT: Shouldn't the
last B be a P?

1:07:23.650 --> 1:07:25.090
PROFESSOR ROBERT SHILLER:
Yes, that's right.

1:07:25.090 --> 1:07:26.800
I can't write always
on the blackboard.

1:07:26.800 --> 1:07:28.890
Thank you.

1:07:28.890 --> 1:07:31.120
Bureau of Consumer Financial
Protection.

1:07:33.920 --> 1:07:37.000
Elizabeth Warren pointed out,
and I said this before, that

1:07:37.000 --> 1:07:39.110
there's a lot of abusive
tactics.

1:07:39.110 --> 1:07:45.300
Now, other regulators weren't so
focused on protecting, say,

1:07:45.300 --> 1:07:49.010
mortgage borrowers or credit
card borrowers.

1:07:51.630 --> 1:07:54.810
They were more focused on
disclosure and other issues.

1:07:54.810 --> 1:07:59.520
So, the idea in Dodd-Frank is,
let's create an agency whose

1:07:59.520 --> 1:08:04.250
express purpose is protecting
the consumer.

1:08:04.250 --> 1:08:08.690
The idea is, that you have to
have an agency focused on each

1:08:08.689 --> 1:08:10.979
problem, and this is a
problem that hasn't

1:08:10.979 --> 1:08:12.149
been dealt with well.

1:08:12.149 --> 1:08:16.229
I wanted to move to in Europe,
because Europe has had similar

1:08:16.229 --> 1:08:20.129
legislation, also in 2010.

1:08:20.130 --> 1:08:21.380
So, we have the European --

1:08:24.340 --> 1:08:25.010
OK, I'll write it out --

1:08:25.010 --> 1:08:32.580
European Supervisory
Framework.

1:08:36.990 --> 1:08:39.570
And that's also in 2010.

1:08:39.569 --> 1:08:44.549
And it consists of a
number of things.

1:08:44.550 --> 1:08:51.780
One, the European Systemic Risk
Board, which will be in

1:08:51.783 --> 1:08:53.963
Frankfurt, well, which is.

1:08:53.960 --> 1:08:56.450
I think they're just
getting started.

1:08:56.450 --> 1:09:00.420
The European Systemic Risk
Board is the European

1:09:00.420 --> 1:09:03.070
counterpart to FSOC.

1:09:03.069 --> 1:09:05.189
All these things are brand new,
and so we don't know too

1:09:05.189 --> 1:09:07.419
much about how they're going
to function yet.

1:09:07.420 --> 1:09:10.350
But it's supposed to worry about
''too big to fail,'' and

1:09:10.350 --> 1:09:13.320
about systems. It's about
systems. How the whole

1:09:13.319 --> 1:09:17.089
European economy could collapse
if something goes

1:09:17.090 --> 1:09:19.610
wrong in the future.

1:09:19.609 --> 1:09:23.169
Then there's the European
Banking Authority.

1:09:23.170 --> 1:09:26.070
These are big steps for Europe,
because regulation was

1:09:26.069 --> 1:09:29.469
more done by the individual
countries.

1:09:29.470 --> 1:09:34.180
And the European Banking
Authority is in London, and it

1:09:34.180 --> 1:09:37.080
will impose Europe-wide
banking regulations.

1:09:41.600 --> 1:09:45.280
And then, we have ESMA,
the European

1:09:45.280 --> 1:09:48.230
Securities Market Authority.

1:09:48.230 --> 1:09:49.480
And that's in Paris.

1:09:51.980 --> 1:09:58.540
And then there is the European
Insurance and Occupational

1:09:58.540 --> 1:10:03.590
Pension Authority, and
that's in Frankfurt.

1:10:03.590 --> 1:10:06.010
They spread things out
across Europe.

1:10:06.005 --> 1:10:08.505
They don't want to centralize
things.

1:10:08.510 --> 1:10:10.870
I don't know why Frankfurt
got two of them, but

1:10:10.870 --> 1:10:14.150
somehow that worked.

1:10:14.150 --> 1:10:15.790
Finally, I want to
do international.

1:10:15.790 --> 1:10:18.360
If I could just have five more
minutes of your time.

1:10:18.360 --> 1:10:23.820
International regulation is a
problem, because people can

1:10:23.820 --> 1:10:26.910
leave the country that
they're in and, you

1:10:26.910 --> 1:10:28.580
know, it's called offshore.

1:10:28.580 --> 1:10:30.440
If you don't like the
regulations in the United

1:10:30.440 --> 1:10:35.010
States, there's always the
Bahamas, or there's the Cayman

1:10:35.010 --> 1:10:39.990
Islands, and you can set up your
financial organization

1:10:39.990 --> 1:10:42.670
with the regulator
that you please.

1:10:42.670 --> 1:10:46.180
That's why it's important for
international cooperation and

1:10:46.180 --> 1:10:51.760
regulation, so that all the
financial activity doesn't

1:10:51.760 --> 1:10:56.000
migrate to the cheapest place,
cheapest in terms of

1:10:56.000 --> 1:10:57.610
regulatory cost.

1:10:57.610 --> 1:10:59.780
But I just wanted to give you
a few more institutions that

1:10:59.780 --> 1:11:00.990
are important.

1:11:00.990 --> 1:11:05.660
One is the Bank for
International Settlements.

1:11:05.660 --> 1:11:07.240
That's in Basel.

1:11:07.240 --> 1:11:11.730
This is the oldest
of my regulators.

1:11:11.730 --> 1:11:12.480
1930.

1:11:12.480 --> 1:11:15.140
Actually, when we get on the
international front, they

1:11:15.140 --> 1:11:18.340
don't really have authority
anymore.

1:11:18.340 --> 1:11:22.480
They can't impose on anyone, but
they can suggest things.

1:11:22.476 --> 1:11:29.086
So, the BIS is a bank that has
as members heads of --

1:11:29.090 --> 1:11:34.090
I think it's 57 central banks.

1:11:34.090 --> 1:11:37.470
And they meet regularly
in Basel to

1:11:37.470 --> 1:11:39.330
discuss monetary policy.

1:11:39.330 --> 1:11:42.490
So, what comes out of these
meetings is suggestions about

1:11:42.490 --> 1:11:44.860
how to run a central bank.

1:11:44.860 --> 1:11:47.850
And it has real impact, even
though it doesn't have the

1:11:47.850 --> 1:11:49.080
force of law.

1:11:49.080 --> 1:11:55.150
Then, I wanted to mention
the Basel Committee,

1:11:55.150 --> 1:11:56.310
also in the same city.

1:11:56.305 --> 1:11:58.825
You notice these are
in Switzerland.

1:11:58.831 --> 1:12:03.341
That's because by longstanding
it's been a neutral country,

1:12:03.340 --> 1:12:06.560
and has such a long tradition of
neutrality, so it seems to

1:12:06.560 --> 1:12:09.060
be the place to set up a
lot of international

1:12:09.060 --> 1:12:10.320
organizations.

1:12:10.320 --> 1:12:19.630
This was created in 1974, and
it issues suggested bank

1:12:19.630 --> 1:12:20.890
regulation.

1:12:20.890 --> 1:12:26.670
Basel I was in 1988.

1:12:26.670 --> 1:12:28.640
That was their first set
of recommendations.

1:12:28.640 --> 1:12:33.750
Basel II was in,
sorry, in 2004.

1:12:33.750 --> 1:12:36.960
And obviously Basel II wasn't
successful, because we had a

1:12:36.960 --> 1:12:38.640
huge banking crisis.

1:12:38.640 --> 1:12:39.770
So, we've had Basel III.

1:12:39.767 --> 1:12:41.017
I'll come back to these.

1:12:45.156 --> 1:12:47.766
Well, it's been going
on for years.

1:12:47.770 --> 1:12:53.390
It was finally approved,
Basel III, in 2010.

1:12:53.390 --> 1:12:57.560
Then, I wanted to talk
about the G-6.

1:12:57.560 --> 1:13:03.410
And going back to the 1970's,
the finance ministers in six

1:13:03.410 --> 1:13:07.020
major countries met together.

1:13:07.020 --> 1:13:10.600
The countries were France,
Germany, Italy, Japan, United

1:13:10.600 --> 1:13:21.250
States, U.K. In 1976, they added
Canada, and it became

1:13:21.250 --> 1:13:23.500
the G-7 countries.

1:13:23.500 --> 1:13:34.690
So, that's Canada, France,
Germany, Italy, U.S., U.K. Who

1:13:34.690 --> 1:13:36.870
am I missing?

1:13:36.870 --> 1:13:38.120
Japan.

1:13:40.700 --> 1:13:44.780
So, these seemed to be the most
financially prominent

1:13:44.780 --> 1:13:47.760
countries at the time, and their
finance ministers got

1:13:47.760 --> 1:13:56.440
together and thought about, what
the countries should do,

1:13:56.440 --> 1:13:59.460
and it coordinated financial
regulations somewhat.

1:13:59.460 --> 1:14:00.790
This expanded notably --

1:14:00.790 --> 1:14:04.860
I'm just about done now --

1:14:04.860 --> 1:14:06.940
in 2008.

1:14:06.940 --> 1:14:10.230
The world was changing, and
there was resentment that

1:14:10.230 --> 1:14:13.130
these countries represent
overwhelmingly Europe and the

1:14:13.130 --> 1:14:15.800
U.S., or North America.

1:14:15.800 --> 1:14:21.390
We created the G-20
countries in 2008.

1:14:21.390 --> 1:14:25.580
And I don't have the whole
list, but it notably adds

1:14:25.580 --> 1:14:29.890
China and India, and adds other
developing countries.

1:14:29.890 --> 1:14:34.000
It now represents most
of the world.

1:14:34.000 --> 1:14:35.880
Again, it's the finance
ministers.

1:14:35.880 --> 1:14:38.290
Typically, what happens now is
the finance ministers will

1:14:38.290 --> 1:14:42.200
meet, and after that the heads
of state will meet.

1:14:42.200 --> 1:14:47.350
And it's involved in financial
regulation.

1:14:47.350 --> 1:14:51.300
The current president of the
G-20 is Nicolas Sarkozy from

1:14:51.300 --> 1:14:52.920
France
[addition: in the year 2011],

1:14:52.920 --> 1:14:55.950
and he intends to make it
a stronger organization.

1:14:55.945 --> 1:14:59.535
He has proposed that they have
a permanent secretariat.

1:14:59.540 --> 1:15:05.400
The G-20 has created something
called the FSB, the Financial

1:15:05.400 --> 1:15:05.960
Stability Board.

1:15:05.960 --> 1:15:08.090
And guess where it is.

1:15:08.090 --> 1:15:10.430
It's in Basel again.

1:15:10.430 --> 1:15:12.070
Any of these things
that are really --

1:15:12.070 --> 1:15:14.880
if it's European Union, they'll
scatter it around the

1:15:14.880 --> 1:15:17.510
EU, but if it's really
international, it seems to go

1:15:17.510 --> 1:15:19.200
to Switzerland.

1:15:19.200 --> 1:15:22.620
Basel is a sleepy little town
if you visit it, but somehow

1:15:22.620 --> 1:15:25.290
it's the center for
the world finance.

1:15:25.290 --> 1:15:28.400
So, the Financial Stability
Board is making

1:15:28.400 --> 1:15:31.260
recommendations for regulatory
procedures

1:15:31.260 --> 1:15:32.580
for the whole world.

1:15:32.580 --> 1:15:36.550
And they report to the G-20,
and then the G-20, they've

1:15:36.550 --> 1:15:39.630
already agreed, to take
FSB seriously.

1:15:45.120 --> 1:15:49.240
So, what I'm seeing here as
developing is, the financial

1:15:49.240 --> 1:15:53.660
regulation is becoming more
and more large scale.

1:15:53.660 --> 1:15:57.870
And it's something that covers
the whole world.

1:15:57.870 --> 1:16:00.660
And it's very important, because
we've just seen a

1:16:00.660 --> 1:16:04.760
worldwide financial crisis, and
it has to be dealt with by

1:16:04.760 --> 1:16:06.000
worldwide --

1:16:06.000 --> 1:16:08.720
I think, this is an inspiring
moment for financial

1:16:08.720 --> 1:16:09.450
regulation.

1:16:09.450 --> 1:16:13.780
The G-20 seems to be an
effective body that is

1:16:13.780 --> 1:16:15.960
promoting good financial
regulation.

1:16:15.960 --> 1:16:19.100
At this point, this is a good
time in history, where there's

1:16:19.100 --> 1:16:20.730
a lot of cooperation.

1:16:20.730 --> 1:16:23.930
And if it continues, and we see
this develop further, it

1:16:23.930 --> 1:16:28.070
will make for a more successful
world economy.