The JOBS Act: Brother Can You Spare a Dime?

March 19, 2012
By

The JOBS Act. Is there no end to the intent of Wall St. and the 1% to bring about the destruction of the U.S. economy? As dumbstruck as I remain by the inexplicable repetitiveness of the political enabling for speculators to continually gouge the average U.S. citizens, I am even more so by total Congressional disregard for historical precedents that have proven beyond a shadow of a doubt that a regulatory system with no teeth will lead 99% of Americans to economic disaster. And this newest dagger into the heart of the 99% cannot be placed at the feet of Republicans alone. Far from it.

Bill after bill, Congress after Congress, has been suckered into bad bills regardless of mounds of proven and reliable information that contraindicates the advisability of the bills they pass. Every time I think that the pool of thought that comprises Congress can get no shallower, they somehow find a way to drain just a little more from it.

Since Richard Nixon left office in disgrace until today, Congress has allowed, no, encouraged a great deal of financial market deregulation. They have allowed big banks to get bigger. They’ve allowed investment banks to co-mingle depositor funds with investors’ funds and to gamble wildly with both. They’ve allowed private insurance companies, with no reporting requirements, to insure publicly traded Investment Banks with so little capital to back up the insurance that the real estate market collapsed under the 50:1 under-reserved AIG private arm insuring the ridiculously over-valued and over-sold bundled mortgages that brought down that real estate house-of-cards in 2008.

The legislative agenda has been largely bipartisan, up to and including the effective repeal of the Glass-Steagall Act (Gramm-Leach-Bliley Act) at the end of the 1990s, and the passage of the Commodities Futures

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http://bioguide.congress.gov/bioguide/photo/G/G000365.jpg Category:Images of Texas (Photo credit: Wikipedia)

Modernization Act of 2000. The two most financially destructive pieces of legislation since the Great Depression, but hardly the only two.

After due legislative consideration, the way was cleared for megabanks to combine commercial and investment banking on a complex global scale. The scene was set for the 2008 financial crisis and the awful recession from which we are just now beginning to emerge, albeit tentatively and slowly. The complete ineptitude of the Senate and House Democrats to rein in the Republican wrecking balls of the American Dream, is as contemptible as the Republicans are heartless.

As I have said before, and contrary to the rhetoric of small government activists, both Republican and Libertarians alike, Capitalism ONLY works if greed and avarice are offset by laws and regulations to prevent fraudulent and deceptive practices.

Why is this so hard to understand?

There is absolutely no historical evidence that “Free-for-All” Capitalism works—because it HAS NOT nor WILL IT EVER…..work!!

With the so-called Jobs Act , on which the Senate is due to vote tomorrow, Tuesday, March 20th, 2012, Congress is poised to pass quite possibly the proverbial straw that will break the economy’s back. It won’t happen immediately, but it will happen.

By ignoring hard evidence of the advisability to the contrary, in a rare bipartisan agreement, Congress is set to abandon much of what is left of the 1930s-era securities legislative restraints that served investors well and helped make the US one of the best places in the world to raise capital for 82 years.

Once again, the United States is on a bipartisan route to self-inflicted fiscal disaster .

God forbid the Senate simply slow down, examine the evidence and make reasonable, logical, and yes, quite possibly unpopular decisions of behalf of the good of the United States. Passing this legislation on Tuesday would be a horrible mistake with almost certainly grave circumstances as the eventual outcome.

The predominant selling point behind the JOBS bill is that our existing securities laws which requires a great deal of upfront disclosure, are significantly holding back the economy.

Pure hogwash.

The bill, HR3606, received bipartisan support in the House with only 23 Democrats voting against). The premise is that the economy and startups are being held back by regulation, a favorite theme of House Republicans for the past 3 ½ years — ignoring completely the banking crisis that caused the recession. Which regulations are supposedly to blame?

The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down. What the bill’s proponents do not point out is that the lack of IPOs is totally normal when the economy  is on a fragile footing or the brink of an economic depression because households’ still have a great deal of debt and unemployment is stubbornly high. And the longer term trends over the past decade are not only globally occurring, but this particular Act will neuter the 2002 Sarbanes-Oxley Act which was the result of momentary Congressional clarity regarding the complete financial fraud and deceptive financial practices by Enron, Inc. and WorldCom. According to Jay Ritter, Cordell Professor of Finance at the University of Florida, testifying before the Senate Committee on Banking, Commerce, and Housing:

“I do not think that the bills being considered [the JOBS Act] will result in a flood of companies going public. I do not think that these bills will result in noticeably higher economic growth and job creation.”

In fact, he also argued that the measures under consideration “might… reduce capital formation.”

Additionally, Professor John Coates, Harvard Professor of Law and Economics, stated flatly in his December, 2011 testimony:

“While the various proposals being considered have been characterized as promoting jobs and economic growth by reducing regulatory burdens and costs, it is better to understand them as changing, in similar ways, the balance that existing securities laws and regulations have struck between the transaction costs of raising capital, on the one hand, and the combined costs of fraud risk and asymmetric and unverifiable information, on the other hand.”

In other words, get ready to get screwed again. Any smart investor worth his weight in salt will want to be better compensated for investing in a particular firm. This raises, not lowers, the cost of capital. The effect on job creation is certain to be negative, not positive, while leaving a very hungry fox to guard the hen house.

Sensible securities laws protect everyone. This includes entrepreneurs who can raise capital more cheaply. The only people who lose out are scam artists like Bernie Madoff.

Investor protection is like fertilizer for investor growth and essential for sustaining capital markets. Experiments involving attempts to survive without such protections have NEVER gone well. There might be a temporary frenzy or more IPOs, but the subsequent fall to reality will be painful, and another blow to the economy as a whole, for the sake of a scant few.

The absolute worst parts of the bill are those that would allow “crowd-financing”, which are exempt from the usual Securities and Exchange Commission disclosure requirements. A new venture could raise up to $1-2 million through internet solicitations (for GOSH SAKES), as long as no investor puts in more than $10,000 (section 301 of HR3606). The level of disclosure would be almost non-existent and there would be virtually no penalties for outright lying. There would also be no effective oversight of stock promotion, which effectively returns us precisely to the situation that prevailed in the 1920s before the eventual (and foreseeable) Great Depression.

How can we be so alarmingly foolish?

This might well pump up the value of particular stocks, just as it did in the 1920s. But these passing stock market bubbles are not without strikingly harsh consequences. The primary reason for the crash of 1929 was the very lack of constraints on what stock promoters could say and do, and we are now coming full-circle to embrace them yet again. Combined with excessive leverage, this led directly to the Great Depression!!!

We still have profoundly excessive leverage in our financial system today, despite the claims of the Federal Reserve. Allowing the unrestricted promotion of stocks in this fashion is a major step down the path to another, much more serious round of economic self-destruction.

Where are the supposed guardians of our financial system?

The White House and in turn our pro-regulation Democrats, are taken with the idea of crowd-financing and want a quick political win in the form of legislation. President Obama and his administration are poised to concede too much to financial sector interests, again. Where is the The Treasury Department who claims to be the “adult supervision” for all matters financial? I can tell you this…it is conspicuously M.I.A. from conversations around this legislation.

Even worse, the Financial Stability Oversight Council turns out to be a meaningless, de-clawed, paper tiger.

The securities industry special interests are strongly supported by Senator Charles Schumer of New York and Majority Leader Harry Reid.

Financial deregulation was the result of decades-long short-sightedness. Another major undermining of our securities law seems certain to take place on Tuesday for the sake of politicians and their respective re-election bids instead of the good of the country.

I wholeheartedly hope that I am mistaken…but I am 100% certain that I am not.

 

Harvey Gold

 

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