Taibbi on the JOBS Act Debacle, by @DavidOAtkins

Taibbi on the JOBS Act Debacle

by David Atkins

One of Matt Taibbi's singular gifts is the ability to take complex financial issues and boil them down in a way that everyone can understand. His latest piece on the awful JOBS Act is a great example of this. I wish I could simply copy and paste the whole thing because mere excerpts don't do it justice, but I'll give you a taste:

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.

And why is that such a big problem? Taibbi explains:

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.

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.

There's much more where that came from, too.

I have to confess that I don't really understand how to solve this problem. The Republican Party is willing to do whatever it takes to eliminate the middle class in favor of Wall Street. The Democratic Party is fractured, with many great progressives like Elizabeth Warren trying to do the right thing, but with a number of corrupt Democrats as well. Also, there's the pesky detail that the Democratic Party wouldn't be able to win elections without its own share of corporate cash.

So screw parties and elections, right? OK, except for the fact that all the laws actually get passed by Congress and legislatures. Or the fact that we'd be at war with Iran right now if McCain were president. Or that whole Supreme Court thing, whose incredible importance should be patently obvious by now. No matter what one thinks of Barack Obama, can anyone imagine how much worse off we would be if Kagan's and Sotomayor's spots on the bench were replaced by Alito clones?

So...third party? Yeah, sure. The Greens and Peace and Freedoms have been around forever. The Greens' biggest impact on national elections was giving Bush the presidency over Al Gore (and on that note, anyone who thinks Al Gore would have invaded Iraq isn't capable of holding an intelligent conversation about politics. The financial crisis would have probably still happened, but we would still have been far, far better off under Gore than under Bush. These things still matter.) But no, the third party candidates most likely to enter America's poisoned political blood stream are Michael Bloomberg, Angus King and (sigh) Linda Parks. If there is any movement away from the two parties, that's the direction the movement is headed. And that's fairly disastrous. Just one look at the viable non-partisan options drives me further into the arms of the Democratic Party as the only credible progressive alternative.

There's popular protest, of course. We've seen the Occupy movement gain some traction by changing the discourse somewhat. Republicans became somewhat more scared of the income inequality message, and Democrats have been more eager to use it. And yet as we enter what is supposed to be an Occupy Spring, crap like the JOBS Act still passes, nor has anyone yet provided a credible answer as to how popular protest on these things is supposed to translate into legislative success.

My best answer at this point remains to attempt to curtail money in politics, while using the partisan techniques the Right has successfully implemented over the last forty years to attempt to make the Democratic Party as progressive as possible, eliminating all the Reagan Democrats (at least in blue areas) as swiftly as the Republicans got rid of their Rockefeller Republicans. I don't see any viable alternatives that have a prayer of success.