To paraphrase Michael Lewis, the former Salomon Bros. bond trader and author of Boomerang, Moneyball and The Big Short, break ’em up, make them small and don’t allow gamblers to give advice to investors.
Lewis famously points out in a Slate interview that future generations will look back at the crash of 2008, and wonder, “How did you not notice 24-year-olds were being paid $2 million a year who clearly didn’t know anything?” And, I would add “How did you expect to put people in a room with a machine that spun junk into gold and not expect them to use it?”
The amazing thing to me is, with all of the hand-wringing and posturing by our politicians following the crash and the subsequent bail-out, not one thing has changed. Dodd-Frank has no teeth in the areas that matter, and has yet to be implemented. I think it was actually passed way back in 2011. Glass-Steagall remains repealed, and there is no legislation in Congress which addresses any of the issues around the four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms.
So, as best as I can tell, there is nothing to prevent Goldman or Citi or the rest from creating the equivalent of a credit default swap, taking a short position on it with its own money and peddling it to others, all the while knowing that it is made of junk. When the new credit default swap crashes and burns, its birth mother makes out like the bandits they are.
That is exactly what happened in the run-up to 2008, and when it all caught fire, we know who was left holding the bag. And, I don’t know how you feel, but I don’t want to go there again.
The simple fix is to break up the banks, making sure that none of them are large enough to hold anyone hostage again and to assure that the (Charles Schwab-like) investment advice is separated from the (Lehman Brothers-like) gamblers on the investment capital side. Make the banks go back to a wealth advisory role and make the gamblers become hedge funds. And, don’t ever hire any MBA’s under 30!
This, by the way, is the same Congress that is sitting on one of the potentially most important pieces of legislation introduced by this Congress, the Entrepreneur Access to Capital bill that seems completely stalled in the Senate. A bill that could lead to actual job growth, enormous capital formation through a new and exciting asset class, and some rocket fuel for an economy that is already sagging (orders for durable goods fell in January by the most in three years and the S&P/Case-Shiller index of property values in 20 cities fell 4 percent from a year earlier, reports showed yesterday).
Why is the Senate sitting on it? Because the same people who brought you the Bernie Madoff Ponzi scheme (which somehow managed to escape SEC attention even after four reviews), are concerned about protecting investors from fraud because, “There are lots of snake-oil salesmen on the Internet.” Really? You want snake-oil? Go down to lower Manhattan.
This fraud excuse is bogus for reasons other that that, however.
First, every crowdfunding site, including iSellerFINANCE, will have thoroughly vetted each offering before it gets posted to their platform, assuring that the same level of due diligence has been performed as would have been the case if a traditional Venture Capital firm had studied the deal.
Second, the various forms of the bill now in the Senate, limit (or cap) the investment at a maximum of $10,000 or 10% of an investor’s annual income. So, someone may lose $10,000. That’s a Mitt Romney bet. Not a serious amount of money for average investors. And, the upside is enormous. $10,000 invested in Amazon, Apple and Google just 8 years ago would be worth a jaw-dropping $402,452 today.
Third, the fraud excuse is really driven by the lobbyists who are working hard on behalf of, guess who? The investment banking community, who will get cut out of whatever this action might turn out to be. Surprise, surprise! And then there is the emotional reason. Somehow, these same politicians are way OK with using crowdfunding for their own campaigns, and yet there is no mechanism in place to protect investors from what happens to them when these guys get in office.
Politicians go out to thousands of supporters and say, “Hey give me as much money as you can afford (capped, of course). Collectively it will add up to something substantive so that I can talk about my goals, build my team, market my message and get elected (or re-elected).” Entrepreneurs do the same thing (take an idea, make a proof of concept, build a company, and hire employees to market and grow) but only with accredited investors (aka millionaires). Here’s the ironic part. It is legal for politicians to go to the masses and advertise, but illegal (under SEC regs) for entrepreneurs to do the same thing. And the bill, in its current form still doesn’t allow “advertising” of these crowdfunding deals. How that gets worked out is anyone’s guess.
When it comes to crowdfunding, entrepreneurs are held to a different standard than politicians. Why are there rules on how much money one has to make in order to give to an entrepreneur but there are none when it comes to politicians? 100% of Americans can give to politicians of their choice but only 5% of the wealthiest Americans can invest in entrepreneurs to create jobs. Really? The rationale, according to the opponents to Crowdfund Investing is that Americans aren’t sophisticated enough to understand the risks inherent in investing in startups.
If they don’t think people are sophisticated enough to decide how to invest a few thousand dollars in a venture, why do they think these same people are smart enough to choose the right candidates? Why do we allow people the freedom to use their money as they wish when it comes to crowdfunding politicians, but we don’t give them the same freedom to use their money as they wish when it comes to investing in startups and entrepreneurs? Are we to assume that there’s no fraud in politics? Should the supporters of Representative Weiner or presidential candidate Herman Cain get refunds?
This election season, over half a billion dollars will go to fund the campaigns of many a politician.
Imagine the impact we could have on our economy if that amount of money went into starting new businesses? Businesses that create jobs; jobs that provide income; income which consumers spend with increased confidence. Increased consumer spending further stimulates the economy. This bill will get us out of this recession. It’s time to let your Senator know how you feel. Let’s get this done!