How Nasdaq's Private Stock Market Could Ruin American Capitalism

Nasdaq is about to launch a new 'private' stock market which they believe will not be subject to SEC regulations and securities laws. Minimum portfolio size for traders: $100M. This is a terrible idea.

Not for the creators. I have no doubt that people will make a lot of money off of this thing. I expect it to be wildly successful as an investment. It is the long term macroeconomic and political consequences that we should fear. Most liberals will probably agree with me right away so allow me to explain why conservatives should oppose it.

There is already a trend of very large corporations seeking to be converted from publicly held companies to privately held ones. Usually this is done through a hedge fund (or a group of hedge funds) taking them over. This trend has been fueled by the consequences of the Sarbanes-Oxley act, which was passed following the Enron scandal and placed enormous new accounting standards on publicly held corporations. While these standards looked good at the time and were intended to prevent Enron-style fraud being perpetrated on investors, the effect has been to create an accounting process so insanely expensive and onerous, with such dramatic consequences for even an innocent mistake, that corporations are deciding that they would rather not be publicly traded at all rather than have to try to comply with those regulations.

This situation is not unlike the major problem of our merchant fleet disappearing as more and more cargo ships sail under Nigerian and Libyan flags in order to avoid the expensive environmental and safety requirements demanded of American-flagged vessels. A good intent but the problem is that when you go past a certain point, the very businesses that you are trying to regulate will take their ball and go play with some other kids instead of you.

As more and more capital flocks to private investment rather than the public American stock exchanges, it was only a matter of time before the disorganization led to a demand for a more orderly market in which to trade. Enter Nasdaq's new private exchange, the 'Portal Market.'

With the history out of the way, now I'm going to start making predictions. Within 10 years, large numbers of major corporations now on the NYSE or Nasdaq will have gone private and gotten themselves listed on the Portal Market. The companies that remain on the NYSE will largely be the junk that the hedge funds didn't want. Overall trading volume on the NYSE will slowly decrease. As more and more large investors take their money out of NYSE and into the Portal Market, the NYSE will become less stable. The really big players whose massive, cautiously managed portfolios keep prices from being blown around like a leaf on the wind will be gone. The NYSE will become a pretty dangerous place to put your money.

Where does this leave ordinary investors? They don't have the $100M minimum to get in on the Portal Market. Investment in stocks will become less and less common among the middle class.

Democrats like myself will be concerned about the lack of opportunity that this means for millions of Americans. Republicans should be even more terrified. Because conservative economic philosophy can only succeed to the extent that ordinary Americans are invested in big business through stock ownership. There is a very good reason why the Bush Administration wanted to allow Social Security money to be invested in the stock market rather than doing away with Social Security completely. Making everyone into an investor guarantees that an overwhelming proportion of the voting public will support conservative economic policies that tend to favor big businesses and less regulation rather than the sort of economic populism that demands redistribution of wealth away from large corporations and towards the middle and lower classes.

Unless the federal government cracks down on this thing, we can expect a sea change in public attitudes towards fiscal policy. All of those tax loopholes that allow companies with billions of dollars of profits to avoid paying any taxes? Gone. Whenever government wants some more money to spend on free pony rides or what-have-you, there will be an easy and politically painless way to pay for it. Just increase taxes on capital gains and corporate profits. The voters won't be investors any longer. It's not going to directly hurt them. It'll look like free money.

A man with $100M to his name, all invested in the Portal Market, may have great wealth but he's still only got one vote on election day. How many votes will all of the participants of the Portal Market consist of? A few thousand. An easily demonized oligarchy, clutching the fruit of capitalism closely to their chests while the teeming millions, shut out in the cold, hate them more and more with each passing year. Trust me, the teeming millions will win the elections.

If Sarbanes-Oxley is not working (and it isn't) then the answer is not creating some parallel private market that will eventually give capitalism a bad name. The answer is amending Sarbanes-Oxley and scaling back some or most of those accounting requirements. This would be true conservatism. Solving a problem by reducing the burden that government places on those under it's yoke, rather than creating a whole other burden. One which will undoubtedly lead to a whole other body of federal regulations governing the Portal Market and having the net effect of more federal regulations rather than less.

The effects of the Portal Market on the American economy will be so far-reaching as to be bad for pretty much everyone. The rich will be taxed more, the middle class will be unable to profit from investment and the results of knee-jerk economic populism and out-of-control federal spending will be an ebbing tide that leaves all boats in the mud. As for the poor, they tend to get screwed either way.

The solution requires that the federal government act quickly with federal regulators on the same page as Congress. First, we need to crack down on the very premise of this market. The high investment threshold should not be a barrier to subjecting the Portal Market to existing regulations. If we need to amend the law to clarify this point, do it. Secondly, we need to amend Sarbanes-Oxley and remove the need for corporations and capital to move away from the existing exchanges. Do these two things in one fell swoop and we can prevent the total disaster that the Portal Market would eventually cause.