March 2009 (17.03) issue
By Daniel Roth
On the morning of March 29, 1933, dozens of reporters filed into the Oval Office for a press conference with the new president. Franklin Roosevelt had taken office earlier that month amid the greatest economic crisis the US had seen: 5,700 banks had failed, 25 percent of the country was unemployed, and more than half of all mortgages were in default.
Hope for a recovery was dim; the public had lost faith in the entire financial system. The number of American investors had exploded, from a few hundred thousand before 1916 to more than 16 million. Yet few of them understood the investments they held, many of which had proven to be junk. Supposedly sound companies were exposed as pyramid schemes. Of the $50 billion in securities sold in the previous decade, half had become worthless.
And yet, as reporters huddled around his desk, Roosevelt sounded confident. "I have something on the Securities Bill today," he announced. That day, members of his brain trust were on Capitol Hill, submitting a plan that would spark the creation of the Securities and Exchange Commission. One overriding concept lay at the center of the legislation: transparency. Louis Brandeis, before becoming a Supreme Court justice, had written an exposé of the financial system for Harper's Weekly, and one passage in particular had lodged in Roosevelt's brain: "Sunlight is said to be the best of disinfectants. Electric lights the most efficient policeman." The proposed bill would require, for the first time, companies to file detailed accounts of their financial health and activity, and bankers would have to report their fees and commissions. As Roosevelt explained it to the reporters around him, the bill "applies the new doctrine of caveat vendor in place of the old doctrine of caveat emptor. In other words, 'Let the seller beware as well as the buyer.' In other words, there is a definite, positive burden on the seller for the first time to tell the truth."
Now, here we are again, 76 years later, facing another crisis of trust that threatens the entire financial system. This time, the issue is no longer a lack of transparency. (More)