With the health care debate over for now, Congress has moved on to "financial reform."
If you don’t recall, a small group of elite bankers at national banks spent the past 20 years or so making billions of dollars in profits by lobbying the Federal Reserve to adopt senseless and irresponsible policies that enabled the national banks to almost literally print their own money.
Somewhere along the way, the recklessness that banks had encouraged everyone else to engage in made its way back into them. The banks made several trillion dollars worth of stupid bets — not "investments," just plain old speculative "bets" — that went sour, causing trillions of dollars in losses. The banks then ran to Congress and the Federal Reserve, complained that the free market had been unkind to them, and received trillions of dollars in guarantees.
Then the elite bankers went back to making billions of dollars in profits the same way they did before.
Somewhere along the way, We The People got angry about that, and started making phone calls. We asked for reform.
Enter Sen. Chris Dodd. He nominally represents the State of Connecticut. He actually represents:
- Securities & Investment $1,275,298
- Lawyers/Law Firms $749,376
- Insurance $612,450
- Real Estate $453,031
- Democratic/Liberal $330,350
- Retired $324,940
- Commercial Banks $293,650
- Health Professionals $289,700
- Leadership PACs $238,500
- Lobbyists $205,475
- Misc Finance $192,500
Those "lawyers" and "lobbyists" undoubtedly lean heavily towards the financial sector. Insurance and real estate companies also work hand-in-hand with the national banks. Odds are, the bulk of Dodd’s campaign contributions come directly or indirectly from the financial sector.
Dodd saw the writing on the wall: reform is coming.
But his "constituents" didn’t want real reform. So Dodd gave them fake reform.
Here’s what Dodd’s "reform" entails…
What the bill actually creates is a Bureau of Consumer Financial Protection within the Federal Reserve, a move that has raised great concern among consumer advocates who note, with more accuracy, that the Fed’s numerous consumer-protection failures played a large role in the recent crisis.
What does a bill attempting to regulate the banking industry have to do with startups? Well unfortunately, it contains two provisions that are quite problematic and hurtful to entrepreneurs and startups. They are:
1) Changing the definition of a "qualified investor" in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd’s bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.
2) Eliminate the existing federal pre-emption over state regulation of "accredited offerings." Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.
I have no idea why either of these provisions ended up in a bill designed to regulate the banking industry. Entrepreneurs and startups don’t use banks to finance them. They get their initial capital from angel investors and then VCs as they grow. This system works well, did not blow up in 2008, and is not in need of reform of the type Dodd wants to throw at us.
…and for taxpayers:
We have a Senate bill that, even before it goes through the legislative meatgrinder, is woefully inadequate. And we still have months and months of negotiations to get through, all of it done in the shadow of a massive lobbying campaign from every financial institution in the country to water things down even more. And that’s despite the fact that, as near as I can tell, that nobody really disagrees about the general shape of the problem here. There’s pretty much universal agreement that reining in leverage is the single most important thing we can do to moderate future financial crises.
The more things change, the more they stay the same.