In an interview with the Daily Agenda today, Professor Bill Black — an expert on white-collar crime and financial fraud, and former senior deputy chief counsel for the Office of Thrift Supervision — discussed the catastrophe that is the Jumpstart Our Business Startups (JOBS) Act, which passed in the House on March 8th and is under consideration by the Senate this afternoon.
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Professor Black, thanks for taking some time to chat about this alarming bill. My first question: How could something with such major financial consequences travel so smoothly through the House?
The great danger is bipartisanship. The only thing you’ll get agreement on from Republicans is neo-liberal economics.
Was there push back?
Dick Durbin opposed it. He dug in his heels. But he has the freedom of someone who’s leaving.
So how were congressional members selling the bill?
This bill is being sold as applying only to new, presumably tiny start-ups. But it actually applies to very large corporate creations. Some of the estimates think that 98% of Initial Public Offerings will fall within these exemptions.
This will be the exception that swallows the rule. This will be the provision that applies to most IPOs, which will work against Mom and Pops. This is going to be the face of fraud in the future.
How will corporations exploit the provision?
The key generally is not corporations trying to exploit this provision: It’s CEOs. What the CEO is frequently doing is looting the corporation. The way you loot a corporation is by making things very opaque. Make it difficult for investors, regulators, and outside auditors to figure out what’s going on… virtually everything in this act makes this world of start-ups much more opaque.
The phrase in the Bible is: “All those that doeth evil hateth the light.”
Well, you mention in the Huffington Post piece, that the idea of a “race to the bottom,” competing to de-regulate, in other words, is a central concern. How does that fit in?
The “regulatory race to the bottom” became famous during the Savings and Loan debacle, where the federal government and various states, particularly Texas and California, had a race to the bottom to de-regulate. 40% of all losses in that debacle came from Texas, and 25% came from California, the two states that won.
Then we came forward to the Enron-era crisis, and the argument was: If we regulate our securities firms intensively, they’ll move to Europe, particularly the City of London. And notice: the argument made by the same people who could care less if the manufacturing plant moves from the United States to China. They say “suck it up!” But if it’s a bank that moves, it’s a crisis. Nobody ever mentions it.
And then what happens? Of course, competition. We’ve got to be weaker than the city of London, so we had to pass the Commodity Futures Modernization Act, otherwise financial derivatives would go to the City of London. Our regulations were weakened even further. Of course, thieves and cheats look to where the law is weakest.
It’s like if you leave your keys in the car. Your car is much more likely to be stolen if you make it easy to steal. And that’s what deregulation does.
And the current situation?
Well, now we come forward to the current crisis. The federal banking agencies competed to be the weakest regulator. And the Office of Thrift Supervision convinced Countrywide to become a Savings and Loan institution, primarily to escape stiffer regulations from its sister banking agencies.
And again the rationale for why we had to weaken all of our banking rules and securities rules was the need to compete against, in this case, German banks. This was the rationale for repealing Glass-Steagall. We had to de-regulate to compete with German Universal banks who were allowed to do both commercial and investment banking. And what ended up happening is we lost our shirts, and the German banks lost their shirts. It was a catastrophe.
And now the JOBS Act is attempting to repeat this scenario?
Just look at what we’re doing now. We’ve suffered the worst crisis in 75 years, one that cost worldwide over 20 million people their jobs, and now Congress and the President, under the theory of supposedly protecting jobs, are pushing through a measure that is the mass destruction of wealth and jobs.
It’s elite financial fraud. We are adopting the wish list of the fraudsters. We’ve gut protections. And we’re doing so on the explicit theory that we need to do this to out-compete the City of London on Initial public offerings. The only way to win a race to the bottom is to refuse to race to the bottom.
So what can be done?
Here’s the good news: For decades, the United States refused to play “race to the bottom,” and things worked brilliantly for America. US equities traded at a premium, that means it was a lot cheaper and easier to raise capital in the United States for real, productive purposes.
Fraud leads you to invest in things that are not productive. It produces massive bubbles, catastrophic financial crises, and enormous job loss.
We have a win-win available to us, to do the things that worked in the past, but instead we’re doing exactly what caused catastrophe in the first place.
Everybody who knows anything about fraud has come out in opposition to this bill. The Securities and Exchange Commission has come out against it. The state regulators have come out against it. Auditors have come out against it. The top criminologists in this area have come out against it.
But it’s falling on deaf ears?
Yes. And they feared us. They didn’t want to have real hearings. It’s like I said earlier: “All those that doeth evil hateth the light.”
Well, thank you very much for chatting with us today Professor.
Of course. My pleasure.
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