I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
--Justice Potter Stewart, concurring opinion, Jacobellis v. Ohio, on pornography
I would like to inject an idea into the ongoing discussion over financial regulation, possibly as an element of regulatory reform.
One of the problems with regulating the financial system is that clever people with a motivation to make money will invent a truly vast array of means to do so, and tend to take a regulation against any given activity as a call for a detour rather than a barricade. What's that you say, derivatives can only be bought or sold by end users? Okay, I want to sell a derivative to this bank here, you're a farmer, Joe, listen, buy this security and sell it to him, here's a hundred bucks for your trouble. What's that you say, a farmer can't buy and sell the same security within six months? Okay, Joe, what you're gonna sell this bank is a different derivative with the same value, the two will cancel each other out for you.
As a dad might say to his son, if you're asking how hard a touch still counts as not hitting your sister, you're missing the point of the rule. I want you not to want to hit your sister.
In American jurisprudence there is a collection of ideas about the "reasonable observer," in part described by Justice Potter's quote above. It appeals simply to what would be obvious to an onlooker, regardless of technicalities. In our example above, it is clear to anyone that banks are selling one another derivatives, and Farmer Joe is a fig leaf. In this tradition I propose that something like the following item be instituted as part of financial regulatory reform:
Any instrument which would appear to a reasonable observer to be designed strictly or in substantial part with intent to circumvent prohibitions under this legislation, while remaining substantially similar in effect to an instrument otherwise prohibited under this legislation, will be regarded as in violation of the prohibitions so identified.
Now, the reasonable observer standard has its flaws. When applied to social cases, such as discrimination or establishment clause cases, it can lead to majoritarianism. But that doesn't seem to be a likely concern here, where few if any social issues are of immediate concern in financial transactions. It's theoretically possible that an honest instrument might be designed which a jury or a judge could rule falls afoul of the legislation, particularly if a prosecutor was willing to overprosecute an edge case. But if an instrument is designed so as to avoid a problem that a regulation was implemented to avoid, such as a conflict of interest, then it would differ in that effect, enough hopefully for a set of human beings in the decisionmaking seats to realize this.
Finally, I should make it clear that I am in no way a lawyer. (Lawyers' commentary is eagerly sought.) I'm just one of the 99% who's sick of some of the game playing. Nor do I imagine that the above will be carved in stone and added to Senate Bill whatever -- if this notion in any way pushes reform in something like its intended direction I'll call this a productive effort. So, submitted for criticism and comment.