This post continues my consideration of some conceptual questions underlying the SEC’s proposed Rule 18f-4. The following comment on the proposal caught my attention:
Congress is stating [in Section 1(b) of the Investment Company Act] that there is a problem when leverage unduly increases the “speculative character” (what we now call risk) of the investments. This was particularly a problem back in the 1930s … [when the] combination of opaque products, complex capital structures, pyramiding, bad corporate governance, and leverage created a toxic brew that resulted in serious losses for unwary investors.
Although this wasn’t the commenter’s point, it struck me that derivatives have the potential to present today all of the problems that senior securities presented in the 1930.
Continue Reading Could the Use of Derivatives Create a “Toxic Brew?”