A number of people, many of them enthusiastic supporters of President Obama, wrote in to complain about my last piece about the JOBS Act. The gist of many of these letters was that the new deregulatory law could in no way be described as "Obama's JOBS Act."
"This was a Republican bill, birthed by Eric Cantor in the House, and driven by overwhelming Republican support," wrote in one emailer. "All Obama did was sign it. It’s totally dishonest to call it an Obama bill."
Okay, let’s talk about that. But first, a quick note on the bill itself, since I think some people misunderstand the objection to the bill.
No one is arguing that America's regulatory framework isn’t convoluted and imperfect, or that raising money for small companies hasn’t been a severe pain in the ass for quite some time. Undoubtedly this new law will make it easier for new firms to attract startup capital and go public, both good things.
But this bill accomplishes those things at the cost of slashing investor protections to a degree that isn’t just unnecessary, but stone-cold crazy. It includes ideas that just ten or fifteen years ago were conclusively proven to result in wide-scale fraud.
For instance, if this bill is supposedly about increasing access to capital for small businesses, why do we also need to repeal the conflict-of-interest ban on bank analysts talking up startup firms in an attempt to gain their investment banking business? Wasn’t it just ten minutes ago that Eliot Spitzer had to drag the entire financial services industry into court for pumping up worthless stocks in order to get their business?
People have apparently forgotten just how crooked the IPO market was during the tech boom. Banks and underwriters were openly, nakedly, offering to sell their research in exchange for investment banking business. Piper Jaffray, for instance, made a pitch to be the investment banker for a medical startup called TheraSense Inc. by including in its pitch materials mock copies of mock research reports – reports that included a "strong buy" recommendation. The "mock" report contained drooling descriptions of the hypothetical sales of TheraSense, calling the company’s fictional sales "nothing short of breathtaking."
Piper Jaffray won TheraSense’s business, pocketed $3,785,512 in investment banking fees, and promptly made good on its promise by issuing a "strong buy" recommendation on the stock.
Merrill Lynch, Bear Stearns, Chase, Lehman, Morgan Stanley: they all did essentially the same stuff. Many of them tied the compensation of their analysts directly to their ability to attract investment banking business, i.e. how much they were willing to prostitute themselves for fees. When a Goldman analyst was asked in a questionnaire to list his top three goals for the year 2000, he answered, "1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue."
Why do we want to go back to those days? And would anyone really argue that we couldn’t come up with a way to, say, legalize crowdfunding without also legalizing the sale of financial research?
This bill is full of things like this, ideas that either have no objective justification, or are already proven losers. It also contains all sorts of lunatic fine-print items that have people in Washington in a panic (including a little-discussed section governing the SEC registration of banks). And while many of the underlying ideas in it are laudable – like for instance the crowdfunding idea – they’re executed in this bill in such a way that even relatively moderate, probusiness critics worry about the potential for excesses.
Columbia Law Professor John Coffee, for instance, who’s not exactly a hair-on-fire, anti-market reformer, told the Senate last year that the removal of the requirement for broker-dealer registrations for those soliciting investment on the internet was so carelessly done, you could have renamed the proposed bill the "Boiler Room Legalization Act of 2011."
"It’s not even bringing us back to the nineties," says a former regulator and Washington-based lawyer. "It’s bringing us back to the Twenties. It’s bringing us back to the penny stock era."
One Senate staffer put it to me this way: "Even the people who are rabid supporters of this thing are saying, 'Wow, I didn’t expect it to come out this extreme.'"
But the worst thing about this law is the way it got passed. It was herded into the books with great speed by key figures in both parties, sidestepping the usual process of having the more dangerous and idiotic provisions stripped out through congressional negotiations.
How that happened brings us back to the question of the bill’s authorship, because this blitzkrieg passage wouldn’t have been possible without the president’s heavy hand.
The Republicans certainly contributed to the JOBS Act, and sponsored the original House bill, and dreamed up some of the final version’s more revolting provisions. But the meat of the bill grew out of three different Obama administration working groups.
The first place to look is in Tim Geithner’s Treasury Department. About a year ago, in March of 2011, the Treasury Department held a conference to discuss how to provide small companies with access to capital. At that conference Treasury decided to convene a working group called the "IPO Task Force."
The group ended up being chaired by Kate Mitchell, the former head of the National Venture Capital Association, a trade group which, obviously, represents venture capitalists.
The stated purpose of this new task force was to remedy the supposed problem of a nationwide drop in IPOs. When the group ultimately released its report later that year, it continually harped on the fact that the number of IPOs had plummeted in the U.S. since the Clinton years.
"After a one-year high of 791 IPOs in 1996," the group wrote, "the U.S. averaged fewer than 157 per year from 2001 to 2008."
Nowhere in the report did the group mention that the astronomical IPO numbers in the second Clinton term correlated to a massive spike in securities/IPO fraud, which resulted in the creation of a huge bubble of overvalued tech stocks. Nor did they mention that when that bubble eventually burst, it resulted in $5 trillion in lost wealth that mainly hit middle America (although the venture capitalists who launched all of those Clinton-era IPOs got to keep the money they made from those deals).
In any case, this powerful venture capitalists’ lobby had a profound impact on the bill. In fact, the conclusions that the Treasury’s IPO Task Force listed in a report released later in 2011 are basically indistinguishable from the recommendations of the NVCA.
You can see that as early as last October, when the IPO Task Force issued its report. By then, both the Task force and the NVCA were pimping some of the more controversial aspects of what would become the JOBS Act, including the "on-ramp" period of extended regulatory relief (which would later be set at five years), the lessening of restrictions on pre-IPO communications to investors. This is how the NVCA described the Task Force recommendations last October:
The task force recommends improving the flow of information about emerging growth companies to investors before and after an IPO… by recognizing a greater role for research during the capital formation process, enacting modifications to existing restrictions on banking research, and expanding permissible pre-filing communications.
The IPO group even came up with some of the key terminology that would later be found in the bill. For instance, here’s one of the recommendations in its October report.
Create a new category of issuer, "emerging growth company," that lasts up to five years and is transitional…
Build on existing scaled disclosure rules to ease compliance burdens during the transition period while maintaining investor protection.
Around the same time the Treasury Department group was preparing its report, the president’s much-ballyhooed Jobs Council was preparing its own policy paper. The new version of the Council, you might remember, was formed in part to answer criticism that Barack Obama somehow hated business and corporations.
Despite the fact that Obama had showered Wall Street with trillions in bailouts (and his Fed appointee Ben Bernanke had given out $16 trillion more in secret emergency lending), the president in the first years of his first term took heat for being too tough on the financial services sector, which particularly objected to the presence of grumpy, down-on-fraud ex-Fed chief Paul Volcker on the president’s Economic Recovery Advisory Board.
So Obama basically sacked Volcker to appease Wall Street and renamed the Economic Recovery Advisory Board, calling it the "President’s Council on Jobs and Competitiveness." He also made a key decision at that time in putting Gene Sperling, a former adviser to both Larry Summers and Timothy Geithner, in charge of his National Economic Council.
Sperling was a key figure in one of the great deregulatory efforts in recent American history, serving as Summers’s key negotiator during the repeal of the Glass-Steagall Act in 1999. Incidentally, just before he took the key Obama post, Sperling earned $887,727 from Goldman Sachs in 2008 for his "advice." His deregulatory fervor would become another factor in the passage of the JOBS Act.
After changing the name of the Economic Recovery Committee to the Jobs Council, Obama made a radical switch of the group’s leadership. No more would it be run by a tough-on-crime curmudgeon like Volcker, who complained about the "moral hazard" of massive public assistance to banks coupled with weakened regulation and enforcement; the new council would have a different flavor.
Instead, it would be run by General Electric CEO Jeffery Immelt, a man who basically personified Volcker’s "moral hazard" concerns. Immelt collected tens of millions in salaries and bonuses for running a firm that a) came crying to the state for over a hundred billion dollars in bailouts, guarantees and surreptitious Fed support in the years after the crash, and b) was under investigation at the time of Immelt’s appointment for a variety of crimes.
Anyway, some time after the crash, as Obama’s own SEC was working out how much to fine Immelt’s own company for (among other things) accounting fraud and rigging municipal bond bids, Obama decided to put Immelt in charge of a task force that ultimately would recommend a slackening of regulatory enforcement as a means to create jobs.
Immelt’s Jobs Council would eventually make a series of recommendations to the president, including among other things a revamping (read: a weakening) of environmental laws, a slackening of immigration rules to allow high-skill immigrants to stay in the U.S., a reduction in the onerous corporate tax burden (Immelt’s GE, by the way, not only paid no federal taxes between 2004 and 2009, it received a tax credit of over $4 billion, despite earning $26 billion in American profits), and a new approach to startups that would allow new companies more access to capital.
Obama was apparently lukewarm about the Council’s other ideas – the consensus on the Hill seems to be that he thought shredding securities laws would upset his base less than an environmental rollback – but he went for the access-to-capital angle. And you can see the Jobs Council’s impact on the JOBS Act clearly in its 2011 year-end report, for instance in this section on "crowdfunding":
Fully leveraging these "crowdfunding" opportunities will require the regulatory changes discussed in our last report, including those that will allow smaller investors to contribute small amounts through crowdfunding platforms.
Immelt’s group lobbied hard for a number of other innovations that would later find their way into the intellectual atmosphere surrounding the JOBS Act, including some slackening of those pesky federal securities laws that Immelt’s own company was having trouble with.
The third participant in the creation of the JOBS Act came from inside the SEC. The Commission had a task force called the "Advisory Committee on Small And Emerging Companies," which played its own role in forming the JOBS Act.
A curious feature of the JOBS Act is that many portions of this law could have been instituted unilaterally by the SEC, which has had this discretion but for years has chosen not to exercise it, because even the SEC knows many of these ideas suck. In fact, some of this new "Small and Emerging Companies" committee’s ideas were actually policies that the SEC had already tried out and discarded, because they didn’t work.
For instance, the committee in early January proposed rolling back the ban on general advertising of new public offerings. The SEC already lifted the ban on this sort of advertising once before, in 1992.
But seven years later, after numerous cases of unsophisticated investors being duped by misleading advertising, the SEC, at the height of the tech boom, reversed its own policy, admitting that the change had led to a surge in so-called “microcap fraud”:
In some cases, Rule 504 has been used in fraudulent schemes … securities are then placed with broker-dealers who use cold-calling techniques to sell the securities at ever-increasing prices to unknowing investors. When their inventory of shares is exhausted, these firms permit the artificial market demand created to collapse, and investors lose much, if not all, of their investment. This scheme is sometimes colloquially referred to as "pump and dump."
It was a great time for the J.T. Marlins of the world. One securities regulation lawyer familiar with the SEC’s thinking when they pulled the plug in 1999 put it this way: "They were like, 'Holy shit, we’ve got a lot of fraud.'"
Now, like an undead monster, the repeal of the so-called "general solicitation" ban is alive again. Some people I talked to who are close to the situation worried specifically about what will happen when you allow public offerings to be advertised "like Viagra," and that the elderly in particular will be popular targets for scammers.
One other note that ought to be of interest: Since the SEC saw fit to create an advisory committee for small and emerging companies, you might naturally assume that they would also create a committee for investors, to help look into the question of how government might better serve and protect their interests. Well, they had such a committee at one time, but it was disbanded in late 2010, after the passage of Dodd-Frank.
But it was reconstituted again. Want to guess when?
How about this past Monday?
That’s right, just as the administration started taking heat for passing a law that will make defrauding investors as easy as strolling to your corner bodega, the SEC quietly reconstituted its "Investor Advisory Committee."
Throughout all of this, the Republicans did indeed have their own versions of the bill working their way through the House. Many of the Republican proposals grew out of Darrell Issa’s Government Affairs Committee, which started examining securities laws and led to Issa penning a sharply-worded letter to Mary Schapiro (now known popularly as the "Issa letter") which essentially accused the SEC of stifling the growth of all small companies with its tiresome fixation on securities fraud.
The Republican ideas melded with administration ideas and led to the passage of key bills like H.R. 2930, the Entrepreneur Access to Capital Act, which passed in November with an astonishing vote of 407-17. The way I hear it, many Democrats in the House were either afraid to throw a "no" vote at a bill so important to the financial services industry (particularly in an election year), or else they sincerely agreed with parts of it and were just banking on the gnarlier parts of the bill getting watered down in the senate.
But sending such an important piece of legislation out the door with 400 votes behind it would prove to have serious political consequences. And the bill turned into basically a guaranteed win when the Obama administration issued its "Statement of Administration Policy" about H.R. 2930 on November 2 of last year. For those of you who complained that this is not an administration bill, here’s what the White House said about the House version last year:
This proposal, which would enable greater flexibility in soliciting relatively small equity investments, grew out of the President’s Startup America initiative and has been endorsed by the President’s Council on Jobs and Competitiveness. H.R. 2930 is broadly consistent with the with the President’s proposal.
A lot of Democrats in the House and the Senate expected Obama to come out with something a little less slobbery in his response to the Republican bill. It seems, in fact, that this was a replay of the Health Care debate, in which the president gave away his entire negotiating leverage at the start of the fight by not threatening a veto or at least expressing serious dissatisfaction with the bill's lack of investor protections. His only caveat was a small line at the end of the statement about a hope that the bill would continue to be worked on to help guarantee better investor protection.
So the bill eventually left the House with 400 votes and the basically unequivocal rubber-stamp of the Democratic president behind it. It then goes to the Senate, where everyone expects that it will be whittled away at least a little by Senate Democrats, whose individual members have more power than House members to make changes.
But a funny thing happened on the way to the Senate debate. In a last-minute change described to me as "very weird," there was basically no formal committee process for this bill. There was no committee markup at all, meaning this monstrously important piece of legislation went straight to the floor without substantive debate.
There was even talk about having the bill voted on by unanimous consent/voice vote, which is what happens in congress when you’re voting on something uncontroversial, like naming a post office or adopting a national "Stan Musial Day" or something.
That didn’t happen, but still: Instead of allowing the bill to go through a normal debate-and-negotiate process in the Senate, it appears someone in the administration – some on the Hill pointed the finger at Sperling – leaned on the Democratic leadership to simply ram the thing through at high speed by sending it straight to the floor, where it passed with 74 votes, splitting the Democratic vote 26-25.
So to recap: Three different Obama-created committees contributed major policy ideas to the bill. Obama himself heartily endorsed it through his Statement of Administration Policy. And the bill sailed through the Democratic-controlled Senate when someone up above decided it would be too much trouble to bother with the normal committee process of debate, testimony, and amendments.
Of course the Republicans wanted this bill, pushed for it, wrote its most piggish passages. But the Republicans always suck on these issues. The real political question, as it always is in Washington, is how much the Democrats choose to fight back and do their jobs, versus how much they choose to step aside and take Wall Street money in exchange for "letting nature take its course." And the JOBS Act is a classic example of a Democratic administration looking the other way while thieves robbed the store.