Editors' Note

Last July, we published a Special Issue devoted to the financial crisis. In our editorial, we quoted Lord Turner’s assessment of the financial crisis as the worst for at least a century, ‘indeed arguably the greatest crisis in the history of finance capitalism’. It is not surprising, therefore, that we return to the subject in this issue by devoting a large portion of our content to different aspects of the preventative actions that are being proposed to avoid (or, perhaps more realistically, limit the damage from) future financial crises. John F. Kennedy once remarked that ‘the Chinese use two brush strokes to write the word “crisis”. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger—but recognize the opportunity’. Wise words. What we need is to learn from the dangerous times in which we live and to use the experience as an opportunity to develop protective mechanisms to avoid future disasters, if possible, and to control the damage if, despite our best efforts, disaster occurs. One of the most hotly debated subjects at the moment concerns the size of banks. Can we afford to have banks that are too big to fail and, therefore, can take risks on the basis that if they win, the risk takers (the employees) make huge profits and, if they lose, the tax payer will bail them out. It is hard for the tax payer to see those who (in their eyes) made the mess by taking irresponsible risks being paid large sums to sort it out (because only they can understand the deals) or getting huge bonuses for successfully trading in a market where only a fool would ‘not’ make money (because interest rates have been forced so low that lending margins guarantee large profits). Our first article looks at the ‘too big to fail’ question, analysing the various proposed solutions to the problem and emphasizing the need for international coordination, without which attempts to control systemically important banks will be doomed to failure. We follow this with an article that looks at the role of short-form disclosure in the securities markets. After all, it has been alleged that one of the things that caused the crisis was the fact that people were buying securities that they did not understand. In the wholesale market, one might perhaps say that investors can and must read prospectuses and that such documents will inevitably be long if there is a great deal to say about risks associated with the issuer’s business or the securities. However, retail investors cannot read lengthy prospectuses. The question, therefore, is how they should be protected. Current proposals in Europe place considerable reliance on reducing the length of disclosure. The article questions whether this is possible or, indeed, desirable. Our third article concentrates on the US equity markets. Secondary trading markets are vital, if capital is to reach those that need it. The article examines the competing attractions of competition between a large number of market participants and the consolidation of orders in a limited number of hands and how a balance may be reached between these polar positions. The problem of bankers’ remuneration (and particularly bonuses) is looked at in our third article. The subject is no longer the preserve of technical experts. More than one taxi driver has expressed to your editors a strong view on some of the issues covered in this piece. Again, after a more sophisticated analysis of the problems caused by the remuneration culture within banks, the article looks at the various solutions that are being proposed. Our final article looks at the impact of the crisis on OTC derivatives and structured debt transactions—at some of the difficulties with pricing and counterparty replacement that have been highlighted by the crisis and the litigation that has arisen from the collapse of Lehman Brothers, ending with an overview of some of the pending regulatory initiatives in the USA and Europe. So there is a lot going on. Plenty of opportunity to come up with sensible solutions and spare humanity the misery of yet more financial crises in the future. When asked whether he thought that Bacon wrote Shakespeare, J. M. Barrie said ‘I know not, sir, but if he did not it seems to me that he missed the opportunity of his life’. We must make sure that we are not guilty of the same negligence in relation to the opportunity that now presents itself.

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