The Old Testament “preacher” who wrote in Ecclesiastes that “there is nothing new under the sun” lived in the days before financial markets. Yet his words remain true and apply there nevertheless.
News that former President Donald Trump might use a SPAC investment platform to get his alternative social media system going reminds economists of a historical bent of an analogous episode back in 1720 — and others in between through history — that were pretty much the same dodge. There is nothing new under the sun.
Don’t know what a SPAC is? Neither did I six months ago. But, just as you don’t notice red Toyota RAV4s until you buy one, and then encounter 20 a day, SPACs now are in the financial news daily. The acronym stands for Special Purpose Acquisition Company, also known as a “blank-check company.” Starting one creates a publicly traded corporation listed on a stock exchange.
But this is not a normal initial public offering, or IPO, of stock for an existing business that has grown to where it needs capital beyond what banks or venture capitalists can offer — businesses that are “going concerns” in accounting terms. These traditional IPOs involve myriad disclosures and regulatory filings. A SPAC does not. Indeed, that’s the very purpose of the whole effort — to avoid filing relevant data with securities regulators to disclose information to prospective investors.
Instead of starting a company making products, like medical devices or electric cars, or software like search engines and social media, or services like Uber or UnitedHealth, a SPAC, when formed, is just a pot of money, filled by investors, that’s intended to be used to buy some existing company in the future.
The target company usually is large. These vehicles are not set up to buy a grain elevator in Pipestone or a jazz club in Fridley. Usually, the target is a business that is incorporated, but the shares of which are not publicly traded. In many cases, it is a company that once was traded and listed on stock exchanges, but then “taken private” in a leveraged buyout.
The Securities and Exchange Commission says, “A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.” Wink, wink!
That last sentence is only “airy persiflage” to use the words of Mr. Peabody, Improbable Historian and adviser to Rocky the Flying Squirrel. The opportunity usually is well-known and whispered about to where it is common knowledge. It is only that nothing is said on the record.
If Trump offers stock in a SPAC that all news media are describing as a vehicle for a new, self-aggrandizing social media platform, no one would say “the opportunity has yet to be identified,” even though in this case, the target company doesn’t exist yet.
It is this same “yet to be identified” sentence, however, that tickles the memory of those with a bent toward history — and folly.
The early 1700s saw a series of frenetic financial bubbles in France and England arising from sales of stock in new, and nearly always fraudulent, ventures — like “the South Sea Company” and John Law’s 1717 Mississippi Company — a French colony trading opportunity.
In 1720, London’s Daily Post ran an advertisement offering shares in “An undertaking of great advantage, but nobody to know what it is.” That soon became a staple example of the gullibility of the public and the ease with which people can be stampeded into investing in fraudulent enterprises. Charles McCay included it in his classic exposition of “Extraordinary Popular Delusions and the Madness of Crowds,” as did other authors. It is cited in myriad econ and finance textbooks.
Scholars do debate whether the Daily Post ad was a spoof to begin with, or whether anyone actually lost much money. Some reports say that the spoofer returned all the small deposits put down by willing punters.
Yet the similarity between investments offered to the public as an “opportunity yet to be identified” and “an undertaking … nobody to know what it is,” three centuries prior, should scare the hell out of sane people. It certainly does me!
Why were SPACs invented? What previously unmet need do they serve? All observers agree that their only reason for existence is to avoid overt disclosures of information to potential investors and avoid filings with regulators. This is folly to the nth power.
Securities regulation exists precisely because unregulated securities markets were replete with out-and-out scams or camouflaged risk-taking that harmed the public again and again. The 1920s and the resulting Great Depression taught that to our ancestors.
“Financial engineers” come up with one financial instrument after another that are supposed to spread risk and make capital flow more efficiently. Stock “pools” run by operators like Joe Kennedy were a 1920s example. And think back to 2007, when there were investment funds whose sole activity was to hold shares in investment funds that held shares in investment funds that had turned mortgages on trailer houses into tradeable financial securities.
The same “preacher” who wrote Ecclesiastes also penned the earthy aphorism, “As a dog returns to his vomit, so a fool repeats his folly.” That aptly describes investors and pundits who repeat the same mistake every decade or so.
Former Fed chair Alan Greenspan wrote a book lauding ingenious new derivative securities that would spread risk to those most willing to take it and lower the cost of mortgages and other borrowing to the rest of us. This would usher in a new era of economic growth and prosperity for all. The book came out just as the whole tower of playing cards that collateralized debt obligations represented collapsed. These derivatives did not identify and allocate risk as promised, they obscured and hid it.
The Economist, that august British news weekly, recently lauded SPACs as promising new and greater flexibility. Take that as “get in the lifeboats boys, she’s going to go down!”
The danger here is not specific to any venture of Donald Trump, although his abuse of those who lend to him has become legendary. Nor are SPACs the only risk flashing laser-like warning signs — the current spate of cryptocurrency offerings and other virtual instruments whose value is only determined by those who create it may join Law’s Mississippi scheme and the South Sea Company in the dusty corners of financial history. But in the short term, they have the potential to cause much pain and suffering.
Remember also that we are in inflated markets resulting from 13 years of unprecedented low interest rates and government stimulus. Just slamming a door on that may trigger panic and a fatal stampede for the exits. Let’s not pass around firecrackers in the meantime.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
Real World Economics: SPACs make old history new again - TwinCities.com-Pioneer Press
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