Bill Black: The “Jumpstart Our Business Startups Act” will create a race to the regulatory bottom
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.
The Jumpstart Our Business Start Up Act, otherwise known as the Jobs Act of 2012, is supposed to free small startups from overregulation so they can raise more capital and we can have new Googles and new Microsofts and such. Critics of the legislation say, yes, it’s going to create jobs: journalists are saying it’s going to create a lot of work for investigative journalists inquiring into fraud; criminologists are saying it’s going to keep them busy looking after fraud. So what is this all about?
Now joining us to talk about it is William Black. Bill Black is an associate professor of economics and law at the University of Missouriâ€“Kansas City. He’s a white-collar criminologist, a former financial regulator, and author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.
WILLIAM K. BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
JAY: So, first of all, what problem was this legislation trying to solve?
BLACK: Well, no problem at all. The equity markets, the stock markets of the United States, were really, really successful markets, and U.S. stocks, which are also called equities, traded at a premium compared to stocks of companies issued in other nations. And the reason they traded as a premium is that only the United States had an effective securities regulator, the Securities and Exchange Commission, the SEC, and that reduced the risk of fraud, and therefore people were willing to pay more for the shares. And if they’re willing to pay more, then you raise more capital. And if you raise more capital, potentially you are more productive and get more jobs and all those good things.
So we had something that worked really well, and then we decided that we should ruin it. And we did that first by weakening the SEC for decades, such that the SEC, by the time of Enron, instead of looking at about 100 percent of securities filings looked at 5 percent of securities filings. And, of course, fraud flourished, hence Enron and WorldCom and all of those good things.
Then you look forward into the ongoing European and U.S. crisis. Well, what was that about? It was overwhelmingly about the shadow banking system. This is the unregulated sector that operates in the shadows because it’s so opaque without regulation. And that caused a nearly global crisis, the Great Recession, a disaster. That one involved, overwhelmingly, debt instruments. Mortgages are debt instruments. The financial derivatives were based onâ€”their value was based on debt instruments. Now we’ve decided to bring the shadow to equities because it worked so well in the credit system.
JAY: Now, if I understand it correctly, the tech sector, including Google and some of the other big companiesâ€”but they’re saying that these small startups, that the cost of coming under SEC regulationâ€”and if I understand correctly, that’s really the essence of what this legislation is is it lowers the bar of who has to file with the SEC when you go out to raise money. It makes it easier for smallerâ€”what are supposedly, at least, smallerâ€”and we can get into why I say supposedly, but a certain number of shareholders, if you’re beneath that bar, you don’t have to file with the SEC. And they’re trying to make that a larger group and still not file. So is there nothing to their argument that it’s to it that of course big filings, big companies can afford all this regulatory documentation, but small startups can’t, so it’s an unfair disadvantage to them? Is there nothing to that argument?
BLACK: No, there is nothing to that argument. And the act doesn’t just do that. The act also mandates supervision lite. In other words, it says for a whole group of companies, you will be registered with the SEC, but you don’t have to comply with the normal rules, the normal rules that make fraud more difficult, the normal rules that create transparencyâ€”in other words, the normal rules that created the equity premium that was so good, so desirable to anyone issuing shares.
So this is not a way of helping honest people issued shares. This helps the frauds, the pump-and-dump schemers. And in particular it has nothing to do with the Apples of the world and such, because that land of high tech has unusually great financing available to it, particularly in the United States, from venture capital firms. And those venture capitalists of course want to know: do you really have assets, do you really have a business plan? So they do want accounting rules. So high tech is not the area that is of interest in this new law at all.
JAY: But I’m reading in the reports that some of the lobbying was coming from the high-tech sector in support of this. Is that not true?
BLACK: That’s true, but it’s not for new startups, tiny places. These are entities that, as you intimated, can be extremely large institutions, and you can spin them off. So Apple and other entities might find it useful to create opaque subsidiaries.
JAY: I mean, one of the things I was reading in the research is that you already have something like I’m about to say. But this legislation, does it expand that, that there’s a limit to the number of shareholders you can have before you have to be filing with the SEC, but you can have a broker who represents hundreds if not thousands of shareholders, but the broker counts like one holder so you’re not forced into the SEC? I mean, does thisâ€”is this part of what the story is?
BLACK: Well, it is true what you said, but your point, of course, goes the other direction, that already under the law they had much more flexibility than they’re claiming. So this isn’tâ€”your first question was really the correct one: what problem is this addressing? And the answer is: it’s not addressing a problem. It’s addressing a desire of those who want to issue fraudulent securities. They love this bill.
And that’s why everybody that knows anything about fraud has opposed this bill. The Securities and Exchange Commission opposes it. The Commodity Futures Trading Commission opposes it. The state securities regulators oppose it. The accountants oppose it. And, of course, white-collar criminologists oppose it. So the letter we created that I signed was also signed by Henry Pontell, who is one of the world’s top five white-collar criminologists, and Gil Geis, who is the greatest living white-collar criminologist in America. These are the people that are absolutely the top in their fields saying that this is a scandal. We called it an atrocity.
JAY: Now, just toâ€”I should have made this clear off the top. This bill has already passed Congress and is awaiting signature by President Obama, which is expected any day. In fact, I hope we publish this story before he signs, ’cause it could be any minute. So, then, who’sâ€”there must be some powerful forces behind it to pass Congress. President Obama wants to sign it. I mean, where is Wall Street on this?
BLACK: Wall Street is, of course, broadly supportive. What this is is the industry’s great desire to weaken Sarbanesâ€“Oxley. Sarbanesâ€“Oxley was the reform law passed after the Enron-era scandals, and it has always been Wall Street’s dream to weaken that law.
People forget that Hank Paulson, the Treasury secretary under Bush, that was his leading objective. As the crisis was building up in mortgages, Treasury, the United States government, did nothing to stop the crisis. Why? Because Treasury was focused 100 percent, in terms of priority, in instead weakening Sarbanesâ€“Oxley. So, yes, Wall Street loves anything that will allow them to start the process of gutting Sarbanesâ€“Oxley.
This law, the Jobs Act, which of course begins by torturing the English language to create this acronym, is premised on precisely the logicâ€”if you can call it logicâ€”that led to our recurrent crises. The logic is the regulatory race to the bottom, that we need weaker rules than the City of London, because otherwise the people will move their offerings to the City of London, where it will be easier to commit fraud. And, of course, if we weaken our rules, then the City of London will weaken its rules, and then that’ll be the excuse for us to weaken our rules further.
And you can guarantee that Wall Street is going to argue, hey, if these smaller companies get to be exempted from Sarbanesâ€“Oxley, that creates a competitive disadvantage for us, and so you need to relieve us from Sarbanesâ€“Oxley. We all know that we’re going to hear that argument ad nauseum. And so this is called the race to the bottom.
JAY: And this was all the logic that led to the deregulation of the 1990s.
BLACK: Yes, and up to the 2000s. This was expressly the argument that Greenspan used in urging the passage of the Commodity Futures Modernization Act, which was also an atrocity, which also made it incredibly easy to commit fraud, which is precisely what AIG did with credit default swaps. The only way to win a race to the bottom is to refuse to engage in the race.
JAY: Thanks for joining us, Bill.
BLACK: Thank you.
JAY: And thank you for joining us on The Real News Network.
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.