There was a recent newspaper article about a consultant from a former financial fund who passed insider information on to a founder of the major hedge fund. The value of this information allowed the founder to make millions in the marketplace. The two are under indictment for insider trading. A commentary in the press proclaimed that severe penalties for insider trading are unfair because it is a victimless crime. It caused me to think, are there no victims?
One individual made millions trading on inside information that was not available to the seller on the other side of the trade. Was there no victim? If the person on the other side of the trade did not sell their shares to the founder, their shares would still have millions in value. For the founder of the hedge fund to make millions, someone had to lose millions. It seems to me like there was a victim—victims, in fact. That they are nameless thousands of sellers does not erase the fact they were victims.
All trading operates on gaps in advantages; trading based on insider knowledge is an unfair advantage. If a major financial firm, however, gets the better of a trade with another major financial firm by being smarter and less risk adverse, and the firm has available funds, that is a fair advantage. But what about trades between unequals? Since it would be considered unfair if a heavyweight fighter fought a bantamweight fighter and a professional hockey team played against a high school team, is it fair when a major financial firm trades against an average investor?
In commerce law, there is a concept that professionals are held to higher standards than the general consuming public. If the major financial firm has all the advantages of knowledge, wealth, skills, and available funds, is that not an unfair advantage over regular investors? Does the law protect against that advantage, or is this a Darwinian survival-of-the-fittest environment, caveat emptor, and no-holds-barred market?
In 2008, spanning into 2010, the general economy of Europe and the US suffered serious setbacks. In particular, the leading firms of the financial industry lost hundreds of billions of dollars. This necessitated the governments to bail out the industry with billions in bailout funds. The taxpayers are the victims of these billions in debt that now must be paid by them. Just as clearly, the leading firms in the financial industry had all their bad decisions forgiven or pardoned by the bailout. Is that an unfair advantage that, with all the knowledge, wealth, skills, and available funds, they also get a free pass when they fail? They made bad decisions, but rather than suffer in a real Darwinian environment, the public treasuries (taxpayers) covered their losses. Did the over $3 billion in lobbying spent by the financial industry in the US over the 10 years prior to the crisis unfairly influence legislatures to allow that industry to avoid oversight? Is that fair? Seems like you can have your cake and eat it!
Why is this of interest to supply and procurement professionals? Supply and procurement are not immune from general fiscal and economic conditions; rather, they are highly influenced by those conditions. The ability for companies to prosper and for sources of supply to sustain operations is dependent on the fiscal health of the economy. Supply commerce is dependent on the free flow of credit, and anything that disrupts that flow limits our ability to manage supply expectations.
The impact of this past (and any future) fiscal crisis is not limited to Wall Street.