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Governmental Regulation of Common Carriers by Railroad (1916)

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The spirit of honesty haunts a corporate boardroom.

Today we are going to discuss a topic that sends shivers down the spines of compliance offers and general counsel everywhere: government regulation. This is a particularly topical subject given all the recent headlines around the world concerning anti-trust, industry crackdowns (China), securities regulation and cryptocurrencies. To make sure we are all up to speed let’s do a quick recap of each:

China’s Business Crackdown

As the Wall Street Journal described it:

“In recent months, China has blown up what would have been the world’s largest initial public offering, launched probes into some of its biggest technology companies, and wiped out more than $1 trillion in market value while investors scramble for cover. There are many signs it isn’t over yet.

Investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns.

Since November, Chinese regulators have taken more than 50 actual or reported actions spanning antitrust, finance, data security and social equality… more than one move a week.”

The chart below demonstrates the toll that these heightened regulations have taken on China’s stock market index:

More on that later.

SEC Takes on Crypto

It seemed inevitable, but it would appear that the SEC is finally getting serious about regulating cryptocurrencies.

“The Securities and Exchange Commission will regulate cryptocurrency markets to the maximum extent possible using its existing authority, Chairman Gary Gensler said Tuesday, while also calling on Congress to grant the agency more scope and resources to oversee the sector. Calling the asset class rife with ‘fraud, scams and abuse,’ Mr. Gensler signaled the SEC is likely to become more active in policing crypto trading and lending platforms, as well as so-called stablecoins.

‘We just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,’ Mr. Gensler said in prepared remarks to the Aspen Security Forum. ‘We have taken and will continue to take our authorities as far as they go’…

‘If this innovation has any chance of surviving into the, you know, late 2020s and 2030s, it can’t stay astride of the public policy,’ said Mr. Gensler.”

Emphasizing Anti-Trust

While there have been less specific actions on this front in the United States, last month President Biden announced an executive order “to promote the interests of American workers, businesses, and consumers.” CNBC reported:

“Through its tech-related actions, Biden’s order aims to make the case that the biggest companies in the sector are wielding their power to box out smaller competitors and exploit consumers’ personal information.

The order calls for regulators to enact a slew of reforms, including increasing their scrutiny of tech mergers and putting more focus on maneuvers such as “killer acquisitions,” in which firms acquire smaller brands to take them out of the market.”

Time will tell what this prioritization of anti-trust policy at home will mean for markets and competition, but it cannot be questioned that the current administration is electing for a more “hands on” approach to anti-trust / regulation. Some of the links in today’s post will look at a previous period in American history where the government transitioned from a similarly hands off administration to one that was fiercely anti-trust.

Now, let’s dive in!

China and the World Financial Markets 1870-1930: Modern Lessons From Historical Globalization

Why This is Relevant:

The onslaught of regulatory actions in China has served investors with a stark reminder of just how brutal regulatory risk can be for one’s portfolio. What is particularly interesting, however, is how similar this all is to events in Chinese markets a century ago. In one of Bloomberg’s recent articles on China’s crackdown, they wrote:

“While Xi’s comments went largely unnoticed by global investors at the time, the crackdown on tutoring companies that followed has become the starkest illustration yet of the Chinese president’s commitment to a sweeping new vision for the world’s second-largest economy — one where the interests of investors take a distant third place to ensuring social stability and national security.

It is the last line that is so important: “the interests of investors take a distant third place to ensuring social stability and national security.” This sentiment will sound familiar to those that know about China’s pushback on foreign investment and outside capital in the early 20th century. Essentially, in the late 19th century / early 20th century foreign investors were pouring huge sums of capital into China as the country was one of the hottest emerging markets in that era. For decades, China welcomed this investment and used the capital to finance its military, fund infrastructure projects and more. Since foreign investors were placing their capital in an emerging market that was inherently riskier than other countries, they put certain “investor protections” in place to safeguard their capital to the extent that it was possible. Eventually, these investor protections proved to be the controversy that sparked a backlash against foreign capital and outside influence in China.

“What makes the external financing of China particularly interesting in this era is the role it played in colonial designs on Chinese sovereignty and the dangers of disequilibrium in the development of financial markets. Foreign investment over roughly eight decades financed remarkable growth in the Chinese economy, however the very protections that induced investors to commit capital to a risky, emerging market also nearly tore the nation apart.

From the foreign perspective, investor protections seemed reasonable – the Chinese government bonds floated by leading investment banks in Europe were backed by revenues collected and overseen by European nationals. Likewise, Chinese railroad bonds were secured with mortgages on the property and revenues of the railway lines, and, while nominally owned by China, they were operated by foreign representatives of the firms that built them. From the Chinese perspective, however, these terms were viewed as an affront to Chinese sovereignty and an impediment to a domestic corporate sector. As a consequence, the terms of Chinese external loans led directly to a backlash against foreign ownership of Chinese capital and foreign encroachment on Chinese sovereignty.”

While the specifics are different, the underlying theme of Chinese leaders taking actions that relegate investors’ interests below those of the state and nation is very similar.


“China began to borrow in the world capital markets in the late 19th century, issuing bonds to pay for defense as well as for large-scale economic development. Particularly interesting is the role that the clash between domestic and international investors played in China’s 1911 revolution. The protection of external investor rights was perceived at the time as an infringement on Chinese sovereignty.

In this paper we interpret the conflict over foreign investor rights in terms of a disequilibrium in the development of financial markets. Europe’s high level of investor diversification put her investors at a relative advantage in bidding for development projects in China, while European investor expectations about protection from expropriation and default, lowered Chinese cost of capital, but also led to erosion of national sovereignty and a dramatic, grassroots political backlash. Despite fundamental differences between China today and China 100 years ago it is still important to consider the dangers of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign  expectations about investor protection.

The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, protection of domestic corporate investor rights is at least as important as protecting foreign investor rights.

Visualizing History:

Notable Quote:

“The role of finance in Chinese politics of a century ago is of more than historical interest. With the re-emergence of global investing in emerging markets, China is poised to attract considerable financial capital. China is in a much stronger position today politically and militarily and thus the issues of extra-territoriality and sovereignty are less threatening than 100 years ago. It is worth noting, however, that in part due to financial history, China is understandably still sensitive to violations of her territorial sovereignty.”

In light of the SEC Chairman’s comments on increasing regulatory scrutiny on the crypto space in order to protect investors, it is worth revisiting what markets were like before the Securities Act. In particular, what did things we take for granted today such as prospectuses look like pre-securities act? If you’ve ever wondered about this, I have the article for you. It truly was a different world. Of the more than two dozen prospectuses of major companies that this author surveyed, only one contained any language pertaining to “risk factors”. The largely unregulated environment that this author describes is very reminiscent of the one that exists today within crypto markets.


“Some legal scholars—skeptics—question the conventional wisdom that corporations failed to provide adequate information to prospective investors before the passage of the Securities Act of 1933. These skeptics argue that the Securities Act’s disclosure requirements were largely unnecessary. For example, Paul G. Mahoney in his 2015 book, Wasting A Crisis: Why Securities Regulation Fails, relied on the fact that the New York Stock Exchange (NYSE) imposed disclosure requirements in the 1920s to conclude that stories about poor pre-Act disclosure are “demonstrably wrong”…

This Article sets out to determine who is correct, those that accept the conventional wisdom that pre-Securities Act disclosure was inadequate, or the skeptics?

The Author examined twenty-five stock prospectuses (the key piece of disclosure provided to prospective investors) that predate the Securities Act. This primary-source documentation strongly suggests that—contrary to the assertions of skeptics—pre-Act prospectuses did fail to provide potential investors with financial statements, as well as information about capitalization and voting rights, and executive compensation.”

Visualizing History:

Coca Cola’s 1919 Prospectus

Notable Quote:

absent from most pre-Act prospectuses were risk factors. Of the twenty-five prospectuses that I reviewed, there was a discussion of risk in only one. That one exception was Coca-Cola, which candidly revealed that there were questions about its ability to enforce its trademark (see below).”

Coca Cola’s Risk Factor Disclosure in 1919 Prospectus

We are in the midst of a transition between two Presidential administrations holding very opposing views on anti-trust and regulatory action. How have markets reacted to such stark contrasts on anti-trust policy before? This paper analyzes the market reaction to President McKinley’s assassination and the prospect of a Teddy Roosevelt administration through the lens of anti-trust policies. While McKinley had been extremely laissez faire in regards to anti-trust actions, Teddy Roosevelt was a notorious trust buster that took the opposite approach.

This table shows the market’s reaction to anti-trust related events in this era:


“We study the importance of discretion in antitrust enforcement by analyzing the response of asset prices to the sudden accession of Theodore Roosevelt to the presidency. During McKinley’s term in office the largest wave of merger activity in American history occurred, and his administration did not attempt to use antitrust laws to restrain any of those mergers. His vice president, Theodore Roosevelt, was known to be a Progressive reformer and much more interested in controlling anticompetitive behavior.

We find that firms with greater vulnerability to antitrust enforcement saw greater declines in their abnormal returns following McKinley’s assassination. The transition from McKinley to Roosevelt caused one of the most significant changes in antitrust enforcement of the Gilded Age—not from new legislation, but from a change in the approach taken to the enforcement of existing law. Our results highlight the importance of enforcement efforts in antitrust.”

Visualizing History:

Notable Quote:

“No period in American history witnessed a more significant consolidation of economic activity into large firms than the Great Merger wave of 1895–1904. William McKinley, who was elected president in 1896, was generally friendly towards business interests, and did not attempt to use the Sherman Act to challenge these mergers. His assassination by an anarchist in September 1901 presents a unique opportunity to study the effects of a change in the president’s attitude towards enforcement of antitrust laws at a time when all other institutions remained unchanged.

In contrast to McKinley, Theodore Roosevelt, who succeeded him as president, had been openly critical of big business. The sudden accession of a well-known Progressive reformer to the presidency likely shifted expectations regarding the aggressiveness with which antitrust laws would be enforced…

Importantly, the change in aggressiveness with which antitrust laws were expected to be enforced meant that firms that had engaged in mergers prior to the assassination were more likely to be vulnerable. We find that following McKinley’s shooting, firms involved in recent mergers saw declines in their abnormal returns that were 1.5 to 2 percentage points greater than those of other firms. We also identify a group of firms that were likely to have been expected to benefit from stronger antitrust enforcement and show that the decline in their abnormal returns was about 2 to 3 percentage points smaller than that of other firms.”


The Bubble Act: Its Passage and Its Effects on Business Organization

Why This is Relevant:

While there are conflicting views on what motivations lay behind the Bubble Act of 1720, the example offers an interesting look at a piece of government legislation aimed at curbing speculation.


“By surveying contemporary sources this article reveals direct evidence for the involvement of the South Sea Company in the passage of the Bubble Act. The dominant position of the Company and of its national debt conversion scheme in the affairs of England in 1720 support the conclusion that the act was in fact a piece of special-interest legislation for the Company. The short-term interest that motivated the enactment, together with the limited legal and economic effects of the act, minimized its significance as a turning point in the long-term development of the English joint-stock company.”

Visualizing History:

Startups being launched in 1720 in the wake of South Sea Company bubble:

Source: Dr. Andrew Odlyzko, An Undertaking of Great Advantage, But Nobody to Know What It Is

Notable Quote:

“Joint-stock promotions were very successful in the last decade of the seventeenth and the early eighteenth centuries. Small bubbles of 1719 and 1720 were promoted by speculators who tried to free ride on the success of the South Sea Bubble and exploit the general feeling of optimism. When the market collapsed, the speculators, the small bubbles, and the joint-stock system were all seen as the causes of the disaster. The Bubble Act of that year cast a shadow on the joint-stock company as a form of business organization for more than a century and ultimately stopped its development. According to this interpretation, the South Sea Bubble was a watershed in the transformation of the incorporated company from the status of recognition and appreciation to one of mistrust and eclipse.”