In the days leading up to the company’s initial public offering last week, the Wall Street Journal has reported, the underwriting banks told major institutional investors that Facebook’s share price would be set way too high — the pricing was “ridiculous,” according to one phone call on which the Journal reported. Facebook’s ad revenue, the big-time investors were told, wasn’t keeping pace with its growth on platforms such as mobile phones, which appear to be less ad-friendly than computers. No one conveyed this information to individual investors, however, many of whom rushed to buy the stock last Friday. By Thursday, Facebook shares had fallen 13 percent from their initial price.
Such “selective disclosure” may be grotesquely unfair, but it’s perfectly legal. The law requires corporations and brokers to inform the public of any information that could affect the value of their stocks — except in the case of IPOs, when securities firms are forbidden from reporting such information to the public until 40 days after the initial offering.
This isn’t a widely known law; the Journal called it “one of Wall Street’s best kept secrets.” It seems to be secret even from some U.S. senators with direct jurisdiction over securities statutes. Republican Bob Corker (Tenn.) told The Hill that he’s been focused more on the $2 billion trading-loss scandal at JPMorgan Chase than on Facebook “because we have regulation that it’s going to affect.” Charles Grassley (R-Iowa) told the same paper that this was a matter for the Securities and Exchange Commission, not Congress. It is indeed a matter for the SEC, but it should be on Congress’s plate as well.
The Facebook affair provides one more bit of confirmation — not that any should be needed — that our economic system, when left to its own devices and when regulated by rules that powerful interests have shaped, tilts grotesquely toward the rich and their institutions. The JPMorgan Chase debacle has highlighted the fact that chief executive Jamie Dimon sits on the board of the Federal Reserve Bank of New York, his company’s primary regulator. Vermont’s Bernie Sanders, the Senate’s sole socialist, and California’s Barbara Boxer (D) introduced a bill this week that forbids such arrangements — a long-overdue reform, as the Fed’s regional banks have always been controlled more by private bankers than public regulators.
Meanwhile, the one thing made clear by the recent debate over the merits of private-equity firms is that those firms’ net effect on job creation and destruction is essentially negligible. Their one undisputed effect — and admitted raison d’etre — is to enrich their investors and, more particularly, the people who work there. The firms’ defenders hail them for creating wealth, though the wealth they create goes chiefly to the wealthy and is often generated by slashing the wages of workers at the companies they take over.
The dysfunction of American capitalism has become the backdrop before which this year’s elections are playing out. Polls show that the American people believe that the nation’s economy has fundamentally changed for the worse, but the two parties are divided over the culprit. Republicans blame government for distorting what would otherwise be a thriving market system; Democrats argue that government must do more to prod those markets to distribute wealth more equitably, thereby increasing the aggregate demand that markets need to thrive.
The United States has not had this kind of fundamental debate over the economy since the 1930s — the last time the economy went to hell and stayed there for many years. But dispirited and bewildered conservatives stayed relatively mute during the Thirties, when Rooseveltian liberalism emerged as the dominant view and socialist critiques of capitalism had more purchase than they do now. Republican rhetoric notwithstanding, no one today — not even Bernie Sanders — is calling for capitalism’s destruction. No, the issues being debated — labor’s power, the rules governing finance, the progressivity of the tax code — concern the nature of our form of capitalism, not its existence. The question is, will it be allowed to continue its drift toward benefiting fewer and fewer of our fellow Americans?