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Researching and writing about Goldman pushed Taibbi around the bend on anything having to do with finance.

A few tidbits: 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."

Oh my gosh - you mean before I invest my hard earned money I should read the PROSPECTUS. Say it ain't so.

Then he goes on to say: 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.

Isn't "post-factum civil litigation" an even better mechanism for enforcement?

Look companies that are "bad actors" are going to cheat the SEC and the public anyway, and companies that aren't "bad actors" had to go through the additional expenses to comply with the SEC regs that have now been relaxed.

I would rather have motivated shareholders (and their lawyers) with an axe to grind policing the markets than bureaucrats. If you look at the job bureaucrats have done to date,the track record is not so great.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/why-obam...




I understand why you'd be skeptical of Taibbi's vehemence; I often am. But I don't think you make a good case here.

Nobody's saying people shouldn't also read the prospectus. But if people can lie in the pitch and then get out of responsibility through an obscure note in the prospectus, more people will lie. It allows classic "the large print giveth and the small print taketh away" scams.

Civil litigation is a terrible method for enforcement. The longer the feedback loop, the more opportunity for things to go wrong. Short-sightedness is a defining characteristic of most scammers. And litigation will only happen when there's enough money at stake and the chances of recovery are high. Small investors are fucked from the start, as is anybody who gets taken by somebody who spends the money in ways where there's little to recover.

Also, your "bad actors" vs "good actors" thing is a total false dichotomy. Actors aren't the problem; it's actions. If you make it easier for "bad actors" to act, you will have more (and more severe) bad actions. Further, through competitive effects, you push everybody in the direction of bad actions.


I agree that civil litigation can be a terrible method of enforcement, however it's like the criticism of democracy being a terrible form of government but better than the alternative.

The problem with "ex ante" regulations governing conduct is you force a lot of wasteful work on a lot of people and companies that becomes a drag on the economy, productivity, whatever you want to call it.

Let's make an analogy that's appropriate for this time of year. Some people cheat on their taxes. Some cheaters get audited and caught, some don't. Since we know that some people cheat on their taxes and an audit will uncover it should we force every tax filer in the US to submit receipts and other documentation for every deduction claimed on their return, at the time of filing?

Can you imagine how much time that would take for filers and the IRS? Can you imagine the outrage on the part of filers?

The Taibbi article sites to a Bloomberg opinion piece that baldly states that people can lie in their pitch and get away with it. However, if you read the legislation (or at least credible legal analysis of it): A) the pre-prospectus presentations can only be made to qualified investors and institutions (meaning you are supposed to be a sophisticated investor, not the general public and will read or pay someone to read the prospectus when it is filed) and B) the actual regulations that will enact the law haven't been written yet.

There definitely will be (and need to be) reasonable regulations to enact this law, I don't argue that at all. I just think the whole tone and content of this article is over the top and biased. I enjoyed reading his evisceration of GS, but I do think it has influenced his writing about anything having to do with the securities markets or finance in general.


Sure, but you can come up with real analogies that cut the other way. And you don't even have to go to hypotheticals.

Take food. The US has reasonably strong food laws. Nobody in their right mind would suggest that we go for China-style food safety laws (mmm, melamine infant formula and "meat" made from whatever fits in the grinder) and then hope that suits from individual sick people fixes it.

Also, you're ignoring half the costs. I have confidence that I can buy pretty much any food in any store or restaurant in my city with very low odds of getting sick and zero odds of getting poisoned. Complying with food safety regulations may be expensive for the producer, but removes very expensive burdens from consumers.

Moreover, a well-regulated market is more friendly to consumers via increased competition. If our food safety laws were poor, then I'd only buy from producers who had very strong reputations. The risk of trying a new product or a cheaper competitor would be much higher, so innovation would be lower and overall prices would be higher.

I think investment in the US is closely analogous. Well-regulated markets can help all participants, buyers and sellers alike.

Also, Taibbi's skepticism of Wall Street is well earned. The recession we are still working out of was mainly caused by financial shenanigans, but nobody is in jail and regulatory fixes have been minimal. Anthony Mozillo, for example, made north of $600m; his eventual punishment was to have to give back 10% of that. Lesson learned, I'm sure!

The JOBS Act could be entirely innocuous, but "once bitten, twice shy" seems reasonable to me.


> The problem with "ex ante" regulations governing conduct is you force a lot of wasteful work on a lot of people and companies that becomes a drag on the economy, productivity, whatever you want to call it.

You're asserting this based on religious beliefs; you've read and heard this statement a lot in the popular media, and it's part of the Republican catechism. But it's false. In fact, the truth is quite the opposite - a heavily regulated environment is the BEST for business, the economy, and productivity. The United States is a good place for business precisely because it is heavily regulated. Nobody steals your plant equipment because there are lots of cops and Marines. People pay their end of the contract because there are lots of courts. Banks don't steal your deposits because the bank regulators are strong, well, that one may be inoperative in 2012 but it used to be true.

The closer the United States comes to non-regulated countries like Somalia, the closer its economy will be to Somalia's.


Excellent point. But I think it's not just dogma that drives this.

There's also tendency toward convenient over-simplification that's common among we nerds. It's a valuable tool; classical mechanics is a lot easier to learn and reason about if you ignore things like air resistance. One of the most important skills for a software developer is willfully ignoring 99% of the complexity to extract the 1% it's worth teaching the computer about.

But it's also dangerous. The simplifying assumptions of economics are things like perfect information, perfect rationality, unlimited mental processing power, unyielding will, and entirely unbiased cognition. That's useful in theory, but misleading in practice. Misleading twice over, because that's how people would like to see themselves. "I don't need regulation! I'm too smart to ever be fooled!"


Small investors are fucked from the start

This has always been the case. The stock market, corporate bonds, land trusts, and any other investment made by a person who isn't an expert in the field is just putting their money into a big black box, crossing their fingers, and hoping more money comes out.

If you've got $100k to invest, go buy a car wash. It's a much safer bet than randomly sticking your money into the mystical black box.

If you've got $10k to invest, find 10 friends and buy a McDonald's. Yeah, it might be buying a job, but those things print money, and if you lose money, you will have lost it betting on yourself.

These are far more sensible solutions to manage your extra cash than throwing it into a mutual fund or a 401k or a savings account managed by someone you don't know in a way that you don't understand. You're just setting yourself up to be victimized when you thought you were 5 years away from retirement.


Non-optimal returns are very different than being screwed over by scammers. One of the reasons that the US has such strong capital markets is that common investments are rarely out-and-out frauds. Whether that's due to the nobility of bankers or our relatively strong regulations is left as an exercise to the reader.

I think you vastly underestimate the costs of real businesses. Looking at BizBen.com, maybe 3% of car washes for sale are under $100k. The average McDonald's grosses $2.2m/yr and is reported to have profits in the 7% range, which would be ~$150k/yr. There's no way you can buy $150k/year in income for $100k.

You also don't account for the opportunity cost of the time and energy, or the increased risk. If I'm taking my investment money and buying myself a job, then if my investment fails my job is gone too. For a lot of people it's better just to put the money in a (tax-advantaged) 401k and spend their energy on what they're actually good at, which is probably not the evaluation and operation of small businesses.


Investing is simply choosing who you want to get to use your money to try to grow.

If you're focussed on returns, unless you have significant control over the companies you invest in, investing anything but a low-overhead tracker of a well-known index is not investing but just plain betting.

If you're not just focused on returns though, you should invest 'on principal' in what you believe in.

I always believed that small companies would in general do/be better, therefore I would've invested in small-caps. Some people want to fund a more eco-friendly world and invest in CleanTech funds. Now if you believe want a world with more startups, you can invest in that.

But yes, having a managed 401k is giving your money to a bunch of dispassionate bureaucrats which in general is not that smart of move.

[EDIT: I didn't know that 401k has tax benefits which might offset the overhead of the bureaucrats.]


How on Earth can you speak about the intelligence of contributing to a 401k if you didn't know their tax benefits?


Not everyone on Earth is an American :)

As wpietri correctly assumed, I thought that a 401k was by definition a managed fund and my comment was directed at managed funds in general.


Also, after switching employers, you can roll your 401k over to an IRA and invest in whatever you want.


It wasn't my comment, but I suspect his focus was more on the managed funds that most people use in 401ks rather than the 401k account type itself.

That's a reasonable suspicion. Warren Buffett's involved in a million-dollar bet on the same topic: http://longbets.org/362/


> Isn't "post-factum civil litigation" an even better mechanism for enforcement?

Only if you prefer getting ripped off and then having to pay lawyers for ten or fifteen years to get back a tiny part of your losses to not getting ripped off in the first place.


Assuming there's anything left to sue for...


> Isn't "post-factum civil litigation" an even better mechanism for enforcement?

No. The future shareholders of the offending company are the ones who pay. Thanks to corporate liability shields, the offending officers will get away.

And oh, cure is better than prevention, right?


> "Look companies that are "bad actors" are going to cheat the SEC and the public anyway, and companies that aren't "bad actors" had to go through the additional expenses[...]"

Isn't it a universal argument against any law?


See my analogy above to income tax filing requirements. It's not an argument against any law but rather reporting requirements. If you lie, cheat or steal, it's against the law. However what you have to do to prove you have not lied, cheated or stolen(prior to any accusation being leveled against you) is the point of reducing the regulatory burden.


Have you ever read a prospectus from start to finish?

Groupon's is ~270 pages long: http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...


1. the only time the pre-prospectus info can differ from the prospectus is before the prospectus is filed. 2. the only people that can legally receive the pre-prospectus information are qualified investors (accredited) or institutions, who supposedly can take care of themselves. 3. if you don't want to read the prospectus but want other information that's "guaranteed" to match the prospectus and you are an individual investor, just read the information that is provided after the prospectus is filed (which is all you should be able to get your hands on anyway, absent the above exclusions).


Section 201 of HR 3606 says

> Not later than 90 days after the date of enactment of this Act, the Securities and Exchange Commission shall revise subsection (d)(1) of section 230.144A of title 17, Code of Federal Regulations, to provide that securities sold under such revised exemption may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising...

http://www.govtrack.us/congress/bills/112/hr3606/text

They no longer have to limit their pre-prospectus info to qualified investors - it is now wide open to advertising to everyone. And instead of only selling to qualified investors, they now can sell to anyone that the seller reasonably believe is a qualified institutional buyer. I can imagine the conversations now: "I can only sell to qualified investors wink, so since you want to buy it, I believe that you are a qualified investor!"


I think there is an opportunity here in dealing prospectus of public companies for investors.


> Isn't "post-factum civil litigation" an even better mechanism for enforcement?

I'm completely in favor of more civil litigation, but I'm reminded of something Ronald Coase,[1] wrote half a century ago: "The fact that actions might have harmful effects on others has been shown to be no obstacle to the introduction of property rights. But it was possible to reach this unequivocal result because the conflicts of interest were between individuals. When large numbers of people are involved, the argument for the institution of property rights is weakened and that for general regulation becomes stronger." Ronald Coase, The Federal Communications Commission (1959).

In that paper he was talking about property rights in spectrum, but the principle is generalizable. Legal action is a great way for a few individuals to enforce claims against a few other individuals. When large numbers of peoples' rights are violated, however, general regulation becomes a more efficient mechanism for enforcement.

[1] An economist whose theories are a bedrock of modern conservative thinking.


> Isn't "post-factum civil litigation" an even better mechanism for enforcement?

That hasn't worked out well for Madoff's "investors".

> Look companies that are "bad actors" are going to cheat the SEC and the public anyway...

And Congress passed Sarbanes-Oxley to prevent future Enrons and WorldComms. HR 3606 repeals SOX for the first 5 years of an "emerging growth company" stock issuance and returns us to the "good old days" when fraudsters were able to run wild.


No after the fact litigation is usually a bad idea because by that time most of the money is gone. You will only get part of your investment and then you will have to pay about half of what you get to the lawyers. And that is if you are lucky. In most securities fraud the money is usually all gone by the time they catch the bad guy.

Furthermore, if you have a couple of bad high profile thefts, that would poison the water for the honest companies too.

As in most cases prudent prevention is better than punishment.

And by the way Taibbi's right. Allowing people to lie on presentations is always a bad idea and will always result in people lying in presentations.


Not only that but the required intermediaries for the crowdfunded companies will be required to do background checks, verification of financials...etc, etc. The details on what will be required, reporting wise, from these companies and the intermediaries that handle the crowdfunding are being worked out now.

I can guarantee it is going to involve a bit more than a powerpoint presentation.

I don't know why they are spreading this FUD.




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