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I started my legal career in 1980, just as the party was really getting started.
Over the following 30+ years of my career, I have lived and worked through the collapse of the Savings & Loan Industry, the collapse of Long Term Capital Management, the Collapse of the dot.com bubble and the euphemistically named Global Financial Crisis of 2008, that almost brought about the collapse of civilization as we know it, together with an long litany of less spectacular financial system failures. Now, I am living and working through a rapidly accelerating erosion of Defined Benefit pension plans and their surreptitious replacement with Defined Contribution savings accounts, leading towards a collapse of our retirement provision (a proper pension plan – a Defined Benefit plan – provides money to live on for as long as we live; a retirement savings plan – a Defined Contribution plan – only provides money to live on until the savings run out…then, what are we going to do?).
It is hard not to live and work through all this collapse and erosion, without developing a nagging feeling that something has gone wrong. Many others share this belief, and choose to cast blame and find fault, echoing many variations on a common theme of “we have too many bad actors acting too badly, and these bad actors need to be made to stop acting so badly”.
Having worked inside the financial industry, and seen the way this industry actually works, and why it is not working the way we need, want and expect that it should, I find this “moral failings” theory of change unsatisfying. Instead of casting blame, I think we have to find a better way.
My search for that better way begins with a diagnosis of the present way. In conducting that diagnosis, all roads lead to Wall Street, and the pension industry.
For decades, Wall St. had been trying to convince pensions to put the vast aggregations of other people’s money entrusted to their good judgement into the stock market. For decades, they had been stymied by the law of fiduciary duty, that prevents fiduciaries, like pension funds, from speculating with the other people’s money entrusted to their good judgement. Trading in stocks and bonds is the very definition of speculation. Look it up. It’s in the dictionary.
In 1972, Wall St found a solution to this vexing fiduciary prudence problem. It is called the Uniform Management of Institutional Funds Act. It declares, overruling centuries of common law and common sense, that trading in securities in not speculation if it is done through a portfolio of properly diversified trading positions constructed on the principles of Modern Portfolio Theory, which asserts that individual share price volatility always reverts to a trend line of constant growth, over time and on average. It is the law of statistics applied to stock prices.
The Uniform Act is something called a Model Law. It was written and published by a self-organized committee of lawyers called the National Commission on Uniform State Laws. It is not a law making body. It’s members are not elected representatives of the people. It is supposed to be a specialized task force assigned to study idionsyncracies in the laws of different states that make it unnecessarily difficult for people to conduct business in different states. No state is required to enact any Model Law. Each state is free to consider and decide on its own.
By 1973, 43 states had enacted the Uniform Management of Institutional Funds Act. Amazing.
It took a little while to get things going, but by the 1980s vast sums of pension money were pouring into the stock market, changing the way those markets work.
What have we learned?
- Pensions and other superfiduciaries putting their superfunds into the economy as equity into enterprise is good for the economy, for society and for society’s superfund set asides.
- Doing it through securities trading is not.