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Forum Post: Why Obama's JOBS Act Couldn't Suck Worse

Posted 2 years ago on April 10, 2012, 10:13 a.m. EST by Demian (497) from San Francisco, CA
This content is user submitted and not an official statement

by Matt Taibbi

Boy, do I feel like an idiot. I've been out there on radio and TV in the last few months saying that I thought there was a chance Barack Obama was listening to the popular anger against Wall Street that drove the Occupy movement, that decisions like putting a for-real law enforcement guy like New York AG Eric Schneiderman in charge of a mortgage fraud task force meant he was at least willing to pay lip service to public outrage against the banks.

Then the JOBS Act happened.

The "Jumpstart Our Business Startups Act" (in addition to everything else, the Act has an annoying, redundant title) will very nearly legalize fraud in the stock market.

In fact, one could say this law is not just a sweeping piece of deregulation that will have an increase in securities fraud as an accidental, ancillary consequence. No, this law actually appears to have been specifically written to encourage fraud in the stock markets.

Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.

The law also rolls back rules designed to prevent bank analysts from talking up a stock just to win business, a practice that was so pervasive in the tech-boom years as to be almost industry standard.

Even worse, the JOBS Act, incredibly, will allow executives to give "pre-prospectus" presentations to investors using PowerPoint and other tools in which they will not be held liable for misrepresentations. These firms will still be obligated to submit prospectuses before their IPOs, and they'll still be held liable for what's in those. But it'll be up to the investor to check and make sure that the prospectus matches the "pre-presentation."

The JOBS Act also loosens a whole range of other reporting requirements, and expands stock investment beyond "accredited investors," giving official sanction to the internet-based fundraising activity known as "crowdfunding."

But the big one, to me, is the bit about exempting firms from real independent tests of internal controls for five years.

When I first read this, I asked myself: how does a law exempting a Silicon Valley startup from independent accounting actually encourage investment? If American companies have to post real, independently-verified numbers when they go public, doesn't that give investors all around the world a big reason to put their money here, instead of investing in, say, Mobbed-Up Siberian Aluminum LLC, or Bangalore Sweatshop Inc.?

In other words, how does letting www.investonawhim.com go to market (and stay on the market for five years!) without publishing real numbers actually help the industry attract more financing in general, when the whole point of all of these controls is to make investment a less risky experience for the investor?

Get ready for the ostensible answer, because you won't believe it. Here's how CNN explained the reasoning behind that exemption:

Having 500 investors or raising $5 million previously forced a company to register with the SEC -- a costly endeavor. Filling out stacks of legal forms and undergoing independent accounting audits can cost hundreds of thousands of dollars. The law loosens requirements for most companies by raising several thresholds. We needed Barack Obama and the congress to compromise the entire U.S. stock market because it's too expensive for a publicly-listed company with billion-dollar ambitions to hire an accountant? That almost sounds like a comedy routine:

SILICON VALLEY EXECUTIVE: Listen, IJustThoughtOfSomething.com is the hottest thing on the internet. We're so huge it hurts... I can't even walk to my corner bodega without women throwing me their phone numbers!

INVESTOR: I'd love to invest. Can I see your numbers from last year?

SILICON VALLEY EXECUTIVE: Well, that's just the thing. We painted the bathrooms last March, and then we also had that Vitamin Water machine put in the lounge. You know, the one next to the ping-pong table? So we just didn't have any money left over for an accountant. But I estimate our revenues for 2014 to be $4.2 billion.

INVESTOR: Sounds hot! Where do I send the check? There's just no benefit that the JOBS Act brings to an honest startup company. In fact, it puts an honest company at a severe disadvantage, because now it has to compete against other, less scrupulous companies that can simply make their projections up on the backs of envelopes.

The JOBS Act seems like it will invite a replay of the disastrous tech-stock bubble of the late nineties. That mess was made possible by a historic collapse in accounting standards, with the great investment banks the pioneers of the collapse.

This is like formally eliminating steroid testing for the first five years of a baseball player's career. Yes, you can pretty much bet that you'll see a lot of home runs in the first few years after you institute a rule like that. But you'd better be ready to stick a lot asterisks in the record books ten or fifteen years down the line.

In the same way, get ready for an avalanche of shareholder suits ten years from now, since post-factum civil litigation will be the only real regulation of the startup market. In fact, there are already supporters talking up future lawsuits as an appropriate tool to replace the regulations being wiped out by this bill.

The JOBS Act seems like it will invite a replay of the disastrous tech-stock bubble of the late nineties. That mess was made possible by a historic collapse in accounting standards, with the great investment banks the pioneers of the collapse. In the old days, in the fifties and sixties for instance, you would never take a company public that wasn't profitable at the time of the IPO, or didn't have a multi-year track record of solid revenues.

When the banks stopped insisting on proven track records or real profitability before taking a company public, there was a sudden explosion of stock-market investment into heretofore unknown internet firms. Companies with no track records went from having literally no revenues at all to having five or six billion dollars' worth of market capitalization overnight. Banks explained that the new way to measure a company was by the quality of its ideas, not boring old indicators like revenues.

Even Alan Greenspan told the world that technology had made such great advances that the traditional laws of economics no longer applied, that there was "new paradigm," and that it was possible to have long-term growth without inflation. He essentially told the world that the bubble wasn't a bubble, because all that phony growth was not phony at all, it was just a whole bunch of people properly evaluating great new ideas, albeit before they had actually performed.

And we later found out, of course, a lot of that value wasn't value at all. And a lot of that sharp growth in the nineties was actually caused by complex fraud schemes like "spinning" and "laddering,", wherein banks artificially pumped up startup stocks in exchange for future business, or rigged the IPOs so that they would have fake "bumps" in investment at pre-arranged times.

Sometimes the companies themselves were the victims in the fraud scams, and sometimes the company executives were beneficiaries of fraud. But in virtually all of these schemes, the casual investor was the big dupe in the con. When the dot-com bubble finally collapsed, costing the world about $5 trillion in losses, the major victims were ordinary people. We can expect a replay of the same thing now, only on a much bigger scale.

The finance world is buzzing over this bill. The reactions I've heard so far range from minutes-long guffaws of dark laughter to bloodcurdling, I-can't-freaking-believe-they-went-this-far outrage. "I thought I had lost the ability to be shocked," one friend of mine, a former regulator, told me this weekend, chuckling at the sheer stones it took to push the law. "But this thing is just inspired. They broke the mold with this one."

There are some crazy side-stories that I'll get to later in the week, including the hilarious influence certain preposterous individuals had in pushing this bill (most notably Steve Case, former co-founder of AOL and a veteran of multiple accounting fraud scandals, who was recruited by both parties to lobby the bill). There are also some remarkable contradictions in the arguments the bill's supporters made when they pushed for the bill's passage. Anyway, more on this to come.

In the meantime, let's just say this is a dramatic step taken by Barack Obama. Nobody should have any illusions about where he stands on Wall Street corruption after this thing. Boss Tweed himself couldn't have done any worse.

http://www.commondreams.org/view/2012/04/09-13

9 Comments

9 Comments


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[-] 3 points by JadedGem (895) 2 years ago

Well, I'm guessing he's not even planning on being re-elected. I refuse to vote for him. In fact I refuse to vote at all until I see something different than the choices I've been offered by both greedy little suck-up parties. Really, pay the 10% early withdrawal penalty and get your money out of pension funds if you have a dime left. Really, I'm serious. You lost a chunk already, the piddling remainder will be worth way more now than it will be in five years if you cash it out and bury it in a mason under your rose bushes. Matching dollars from a corporation, bs, those were eaten up in the last fiasco. I'm dead serious. Research this, if it is actually true, take whatever you can get out of your pension funds cash those bad boys out and buy a shovel.

[-] 0 points by JanitorInaDrum (134) 2 years ago

Brilliant! However, for the last many years since denying the money changers ANY control over my wealth, I've invested it myself in tanglibles which have directly stimulated the economies of regular people around me.

I don't think burying it is the best plan, but, much better than being a dumbfounded sitting duck, crippled and hypnotized by bi-party shiny neon, knowing exactly what is getting ready to happen next.

Glad to see others who are also with a pulse and not submissive to DC's Wall Street rectal reaming machine.

[-] 2 points by JadedGem (895) 2 years ago

Well, public education is not so good. Most people I know would do better with the jar than investing, (me included!). The danger is in handing other people your money to manage for you. The wealthy will get theirs and dump toxic stock on small investors and pension funds and small investment accounts. The little people will be duped. While investment groups like Blackwater sound cool, they funnel money into despots like Monsanto. You know people you wouldn't trust not to take off your plate or spike your drink if you were making your own decisions. The big boys can't be disappointed but in a clinch they can shift their risky bad stock onto numerous small accounts. Who cares about legal these days, right?

[-] 1 points by JanitorInaDrum (134) 2 years ago

http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314

Legal? Constitutional? Nobody on Wall Street or in DC......

[-] 1 points by JadedGem (895) 2 years ago

I loved that article so much. I loved that the writer could use the necessary language to describe the problems oh so accurately. What is really going on is a criminal, government empowered, concerted effort to rape and pillage the entire world. Greed guts has went insane and is trying to eat the world up. My grandfather would see one of us kids not wanting share when we were children and he'd point at us and say, "Greedy Guts ate the world up and then he didn't have a thing to stand on!" It has played threw my mind many times when confronted the reality of the billionaires, the bankers, the crooked politicians. My children will have nothing to stand on, the whole earth will be in ruins, it'll make the great depression look like spring break!

[-] 1 points by JesseHeffran (3903) 2 years ago

That guy can write. No?

[-] 1 points by JanitorInaDrum (134) 2 years ago

Oh yeah....... reading it was almost like seeing the movie

[-] 1 points by SparkyJP (1646) from Westminster, MD 2 years ago

I've been saying for a long time - "Judge him by his actions; not his words."

[-] 1 points by JesseHeffran (3903) 2 years ago

This article makes me wish OWS would run a third party candidate. If Obama could not see the unintended consequences of this one, he is either an idiot or a crook. Unless he just wants the unemployment numbers to go down long enough to get reelected, this seems like a disastrously bad idea.