Co-written with Henry N. Pontell and Gilbert Geis*
As white-collar criminologists (and a former financial regulator and enforcement head) and experts in ferreting out sophisticated financial frauds, our careers and research focus on financial fraud by the world's most elite private sector criminals and their political cronies. Therefore, we write to thank Congress and the President for preparing to adopt a JOBS Act that will provide us with job security for life. We will be the personal beneficiaries of Congress' decision to adopt the law without the pesky hearings that would allow critics to launch devastating attacks on the proposed bill based on a brutally unfair tactic - the presentation of facts. Unfortunately, in our professional capacities, we must oppose the bill. This bill is an atrocity.
The "Jumpstart Our Business Startups" Act, the comically forced effort to create a catchy acronym, is the most cynical bill to emerge from a cynical Congress and Administration. It is an exemplar of why congressional approval ratings are well below those of used car dealers. The JOBS Act is something only a financial scavenger could love. It will create a fraud-friendly and fraud-enhancing environment. It will add to the unprecedented level of financial fraud by our most elite CEOs that has devastated the U.S. and European economies and cost over 20 million people their jobs. Financial fraud is a prime jobs killer.
Powerful regulatory regimes -- strong accounting rules, strict corporate governance, tough securities laws, and vigorous civil and criminal enforcement of the regulations and laws is the greatest infrastructure for strong economic growth that a nation can provide. For decades, the U.S. had an enormous competitive advantage over other nations in raising funds through securities because investors placed great trust in issuers that were subject to effective regulation. U.S. equities traded at a substantial premium compared to securities issued in other nations (which means that companies could raise capital much more effectively and inexpensively). Regulators serve as the "cops on the beat" that prevent a Gresham's Dynamic in which "bad ethics drives good ethics out of the markets."
Our system worked brilliantly. America prospered. American businesses and investors prospered. Unfortunately, economists decided to destroy what worked and to replace it with a fraud-friendly, deregulated world. Alan Greenspan was only the most prominent high priest of the following dogma: "a rule against fraud is not an essential or ... an important ingredient of securities markets" (Easterbrook & Fischel 1991). This faith-based economics had no basis in reality, but it led to aggressive anti-regulatory leaders whose policies were so criminogenic that they led to recurrent and ever-larger serious financial crises.
George Akerlof, Nobel Laureate in Economics (2001), and Paul Romer wrote the definitive economics article on financial fraud in 1993 (Looting: the Economic Underworld of Bankruptcy for Profit). They ended it with the following to emphasize a profound policy message.
"Neither the public nor economists foresaw that S&L deregulation was bound to produce looting. Therefore, they could not imagine how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself" (p. 60).
But economists, as a group, proved that they did not "know better" and that their problem was not that they were "unaware of the concept" of looting "control frauds" (frauds led by the leaders of seemingly legitimate entities). Economists, overwhelmingly, have ignored a Nobel Laureate in economics, white-collar criminologists and experts on public administration and regulation. They have compounded their mistakes and they have dominated financial policy in the U.S. and Europe -- the epicenters of the crises.
Among the many fraud-friendly policies that led to the deregulation that prompts our recurrent, intensifying financial crises, the undisputed most destructive aspect is the recurrent, intensifying embrace of the "regulatory race to the bottom." The "logic" of the argument in the securities law context is that (1) dishonest issuers like bad regulation because it allows them to defraud with impunity, (2) our "competitor" nations (typically described as the City of London) offer weaker regulation to induce the fraudulent issuers to locate abroad, and (3) we must not allow this to happen; we must make sure that fraudulent issuers are based in America. Of course, they never phrase honestly their "logic" about dishonesty. Four national commissions investigated the causes of financial crises -- the S&L debacle, the ongoing U.S. crisis, the Irish crisis, and the Icelandic crisis. Each of the commissions has decried the idiocy of the "race to the bottom" dynamic and warned that it must end. The arguments advanced by industry in support of the JOBS Act reflect and worship at the altar of "the race to the bottom."
It is self-defeating for us to say this because as criminologists and anti-fraud specialists we would have job security for life if this bill was adopted. It is literally composed of the wish list in regard to fraud-friendly provisions that those intent on cheating have been dreaming about and salivating to achieve for decades. This bill will kill millions of jobs because financial frauds are weapons of mass financial destruction. It will start an international fraud-friendly deregulation race to the bottom and will become the basis for further criminogenic U.S. Congressional actions.
* William K. Black is Associate Professor of Economics and Law at the University of Missouri-Kansas City. Henry N. Pontell is Professor of Criminology, Law and Society at the University of California, Irvine. Gilbert Geis is Professor Emeritus of Criminology, Law and Society at the University of California, Irving. Janet Tavakoli is President of Tavakoli Structured Finance, Inc. Barry Ritholtz is CEO; Director of Equity Research,