Thursday, August 30, 2012

Left Side of the Aisle #71 - Part 1

Outrage of the Week: SEC helps banks, helps fraud, hurts ordinary investors

Back in April I talked about the newly-passed so-called JOBS Act. It stands for, in one of the most weirdly forced acronyms ever, the Jumpstart Our Business Startups Act. The bill passed Congress overwhelmingly with bipartisan support. Obama loves the thing. And who could be against it? It's all about jobs!

Well, I said then and I say now that the bill was well-named because it's actually a bunch of j.o.s pushing b.s.

The supposed purpose of bill is to enable our dynamic entrepreneurs reinvigorating the economy by helping them to better raise funds for start-ups.

How? First by exempting them from some federally-required accounting and reporting rules and second by making it easier for them to raise money by both ending the ban on advertising for investors and by allowing for so-called "crowdfunding," which involves going on social media to raise large amounts of money from a large number of small investors.

In short, it allows these "entrepreneurs" to raise millions of dollars without having to tell investors much of anything about the company or its finances. All those nasty disclosure requirements are gone, all those pesky accounting duties are gone, leaving only the brightly-colored brochures and the web ads full of "you too can be rich as Mitt Romney" dreams. What could go wrong?

Economists say it will "open the floodgates to massive fraud" and that "crowdfunding could make the scams of the 1980s look like parking tickets." State-level regulators say it prevents them from regulating, so these companies’ efforts to raise capital would be essentially unregulated on federal or state level. A group of white-collar criminologists called the bill "an atrocity" and "a wish list of fraud-friendly provisions." And the Consumer Federation of America said it was done without evidence that these entrepreneurs actually are having difficulty raising capital - that is, it was passed without any evidence that there was a problem that needed solving.

We have been down this road before. For 40 years or more, we have been pushing for deregulation of anything and everything. We deregulated some financial institutions and got the S&L crisis. We passed some more deregulations, and we got Enron, WorldCom, and the rest. In the 1990s, lifting the ban on advertising for investors led to such a rapid and dramatic increase in fraud that the ban was reinstated. Despite all that, we deregulated some more and saw the whole financial industry melt down in 2008. And what has been the response each and every time? To look around for some other area that we have yet to deregulate - or, as in this case, looking to repeat previous failures.

On top of everything else, the JOBS act very likely will not add any jobs, in fact it is more likely to slow their creation. It increases the risk of fraud and therefore increases the risk to investors - and the cost involved in raising capital are usually tied to the degree of risk. So the JOBS Act could well mean that any honest entrepreneur who really does want to start a new company may well find it harder, not easier, to raise capital.

The Securities and Exchange Commission is supposed to be the cop on the beat about things like investor protection. So what is the agency doing? It's trying to rush through rules to enable the provisions of the act, that is, to "open the floodgates to fraud." In fact, so eager is the SEC to get this done that on August 22, it tried to promulgate rules without allowing for the legally-required period for public comments.

The agency backed off that after the Consumer Federation of America, along with a number of distinguished co-singers, wrote a stinging letter noting how the SEC's plans violated federal law. Instead, it was to hold a vote on August 29 on if it will put out a proposal for public comment.

At the same time that the SEC trying to do an end-run around the public and the law and, in the name of helping new corporations to form, make it easier for cheats, chiselers, and rip-off artists to defraud the rest of us, the agency has announced that it is abandoning plans to impose tougher rules on money-market mutual funds. Former SEC Chairman Arthur Levitt called that act a “national disgrace."

You want to know what that's happening? Why that regulation is failing? One reason and one reason only: The sponsors of money-market funds, which include such as Goldman Sachs and Morgan Stanley, simply don’t want it.

Making things easier for the fraudsters and the big banks (pardon my redundancy) while making it harder on and riskier for ordinary investors - that's what the SEC is about. Because whatever the big banks want, the big banks get. And this ain't no musical - what it is, is the Outrage of the Week.


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