[Plura-list] SPACs were hugely successful (for banks)

Cory Doctorow doctorow at craphound.com
Mon May 23 11:51:10 EDT 2022

Read today's issue online at: https://pluralistic.net/2022/05/23/you-got-spacced/


This Weds (May 25), I'm giving a virtual keynote at the ABC Copyright Conference (University of Western Ontario/London):



Today's links

* SPACs were hugely successful (for banks): But you lost your shirt.

* Hey look at this: Delights to delectate.

* This day in history: 2002, 2007, 2012, 2017, 2021

* Colophon: Recent publications, upcoming/recent appearances, current writing projects, current reading


🕛 SPACs were hugely successful (for banks)

Remember SPACs? For a while, you couldn't turn around without hearing about a celeb who was backing a "blank check" IPO. It was confusing, because SPACs don't make any sense: you buy into a company at $10/share. The company has no business, no products, nothing. But it plans on going public, and then buying *another* company.

In theory, you're betting that some celebrity-endorsed randos will take all the $10 share buy-ins and use the money to buy another company - a company that couldn't go public otherwise - and that company, despite its deficiencies, will go on to make enough money to make those $10 shares pay off.

This is a bad bet. As the dust settles on the SPAC run, the average SPAC is down 36%, and SPAC investors have collectively lost $4.8b (for comparison, the overall market is down 14% over the same period). In retrospect, this was an obvious outcome, as, by definition, a SPAC investment is a blind bet, like throwing darts at the stock market.

Which raises the question, how did everyday investors come to plow $21.3b into the stock equivalent of a carny midway lucky dip? The answer: the world's largest banks convinced them to, by spending millions promoting SPACs as the next great investment. It was - for the banks. As Jessica DiNapoli reports for Reuters, banks made a fortune promoting SPACs.


The house always wins. Banks' underwriting fees for SPACs were the only safe bet in the whole craze, And Jpmorgan, Morgan Stanley, Credit Suisse, Citi, Deutsche Bank and others made millions in fees. They also got to double-dip, since many SPAC acquisition targets were companies these same banks had invested in. The banks invested in a company, promoted a SPAC, sold the company to the SPAC, and then cashed out before the company's growth promises burst.

What's more, the banks got those $10 shares at steep discounts, so they cashed out a third time, selling on the IPO "pop" when the shares briefly skyrocketed.

SPAC acquisitions are a real flock of turkeys, but one of these stands out as an especially spectacular failure: Trump Media & Technology Group, which SPACced its way to $1.25b to launch Truth Social, a Gab/Parler also-ran that has stagnated since its launch.

SPACs weren't just a bubble - they were a scam perpetrated by the finance industry, who acted as the house in a rigged financial casino, and the house always wins. The banks made millions. Everyday investors lost everything - like Kyle Brown, an accountant who lost his life's savings buying into the Carlotz SPAC, which Deutsche Bank sold as a sure thing. Carlotz shares are now down more than 90%.

The term "financialization" gets thrown around a lot without any explanation of what that means. This is what that means. Financialization is what happens when the real economy takes a backseat to the normally boring job of "capital formation" - raising money to loan to or invest in promising businesses.

As Keynes said: "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." As Matt Stoller writes in his BIG newsletter, the finance sector used to collect 2% on its investments, and today it's 9%.


Stoller: "To put it differently, a small number of people are collecting hundreds of billions of dollars in fees running private equity funds, but private equity is no better (and probably worse) in terms of returns than public equity indexes."

When banks can make more money rooking suckers in confidence games than they can by loaning money to productive businesses, the productive economy suffers. First, because capital is misallocated - funneled into bankers' pockets for useless SPACs, rather than being used to build factories, train workers, invent new products and processes, and improve logistics.

But financialization doesn't just starve the real economy of the capital it needs to grow, it actually *destroys* real economy businesses, as when private equity firms undertake leveraged buyouts (buying a company with other peoples' money, using the company itself as collateral). Once the companies are debt-loaded, PE owners slash their staffing, reduce the quality of their products, screw over their suppliers, and sell off their assets. The proceeds from this hollowing-out go to the private equity companies in the form of "management fees."


Thanks to the "carried interest" tax loophole - which has nothing to do with debt interest, and is based on 16th century sea-captain law - much of this money is tax-free, leaving PE barons with even more money to convert into power, specifically, the power to accelerate financialization:


Financialization, then, blocks investment in productive businesses, and destroys existing productive businesses. This has many adverse effects, but one of the most immediate ones is that it makes it much harder to invest wisely, based on fundamentals like "who makes good products in an efficient manner?"

For Americans lucky enough to have money to save for pensions, this is a terrifying turn of events. The theory of 401(k)s and other self-invested pensions is that you can only avoid a miserable, hungry, cold old age if you pick good stocks. But "good" stocks are increasingly stocks like SPACs: pure financial speculation, where you make money by buying early and then unloading your useless paper on a sucker who comes later.

Avoiding homelessness and starvation in retirement *requires* you to invest, and in a financial economy, "investing" is synonymous with "gambling," and again, the house always wins.

But even if you can't afford pension savings, financialization has grave consequences for your quality of life. The real economy is where all the things we rely on are made and supplied, after all. America's inability to manufacture PPE - or any of the other products that have disappeared from shelves during China's shutdown - is down to this.

American businesses chased lower wages and higher margins by moving their operations offshore, firing their staff and replacing them with contractors, selling off their buffer stocks, and merging with one another and shutting down "redundant" production lines:


As Stoller puts it, this is how we ended up with an economy where Christie's sells a Warhol painting for $195m while grocery store shelves are bare of baby formula. People need baby formula, which suggests that the $195m might be better spent on baby formula factories - but the formula market has been sewn up by a cartel:


The cartel will destroy anyone who tries to compete with it, so capital ends up going into speculative markets like Warhol paintings. Not only are $195m paintings a far worse use of capital than baby-formula factories, they're also a bad investment. The Warhol market has been sewn up by a cartel of Warhol-hoarding art-dealers who bid up the price of any listed painting to protect their investment. Wash-trading isn't just for NFTs! The house *always* wins.


The world needs to invest in the productive economy. Surviving the climate emergency will require a vast mobilization of capital to electrify our transportation, produce batteries, retrofit or replace housing stock, house tens (or hundreds) of millions of climate refugees, restore habitats and clean up waste.

The finance sector will not make those investments on their own. So long as financialization rules, it will always be more profitable to form monopolies, loot productive businesses, and sucker desperate people into the casino where the house always wins.

That's why it's exciting to see Biden's administrative agencies taking aim at private equity firms. Last winter, SEC chair Gary Gensler announced sweeping new regs for the private equity industry. The industry's squeals of outrage were pure music:


Now, Jonathan Kanter, the DoJ's top antitrust enforcer, has announced the end of regulatory tolerance for private equity "rollups" - where a PE firm buys a company and all its competitors and runs them as a single business, allowing it to loot a whole sector without worrying about competition from firms that aren't being drained:


That has elicited its own set of extremely satisfying squeals of outrage, led by Larry Summers, a man who has never been right about anything in his life, who now says that cracking down on PE firms and focusing on the productive economy will make America "more inflationary and less resilient."


As Hal Singer writes, this is a pure straw-man. Concentration accelerates shortages, market power allows for inflation-increasing price gouging.


The finance sector doesn't make things. It doesn't grow food. It doesn't teach your kids. It doesn't heal your injuries. It doesn't house you. It doesn't clothe you. Finance for its own sake makes nothing - except money. Our future survival depends on radical, mass-scale material production. So long as the finance sector is running the show, all we'll get is a casino.


🕛 Hey look at this

* Predatory community https://blog.mollywhite.net/predatory-community/


🕛 This day in history

#20yrsago Disney is in deep Pooh with the Milne heirs https://www.latimes.com/archives/la-xpm-2002-may-23-fi-disney23-story.html

#20yrsago Hollywood wants to plug your hole https://web.archive.org/web/20020802073530/https://bpdg.blogs.eff.org/archives/000113.html

#15yrsago How to make OpenCola https://www.wikihow.com/Make-OpenCola

#10yrsago HOWTO make Star Wars vehicles from 3.5″ floppies https://www.instructables.com/Millennium-Falcon-and-X-Wing-from-Floppy-Disk-wit/

#15yrsago Electric Slide creator foreswears DMCA, embraces Creative Commons https://web.archive.org/web/20070524091805/https://www.eff.org/legal/cases/electricslide/

#10yrsago Year of the Beasts: young adult comics/prose story of the summer when it all changed https://memex.craphound.com/2012/05/22/year-of-the-beasts-young-adult-comics-prose-story-of-the-summer-when-it-all-changed/

#10yrsago Objectivist C: a selfish programming language https://fdiv.net/2012/04/01/introduction-objectivist-c

#10yrsago Congress’s vocabulary falls a full grade level in seven years https://sunlightfoundation.com/2012/05/21/grade-level-congress/

#10yrsago Sickening profile of Canada’s weapons-grade patent trolls https://www.wired.com/2012/05/rockstar/

#10yrsago Former Warner Music CTO: Of course leaked albums drive sales! https://www.techdirt.com/2012/05/21/former-record-label-exec-ethan-kaplan-duh-course-more-file-sharing-leads-to-more-sales/

#10yrsago Neil Gaiman commencement address explains the artist’s life https://vimeo.com/42372767

#5yrsago The FCC will not disregard anti-Net Neutrality comments left by identity-stealing bots https://www.vocativ.com/431065/fcc-ajit-pai-net-neutrality-bots/

#5yrsago How can networked protest movements hold power while staying flexible and inclusive? https://www.wired.com/2017/05/twitter-tear-gas-protest-age-social-media/

#5yrsago Thailand is losing the war on dissent, thanks to user notifications and HTTPS https://www.eff.org/deeplinks/2017/05/online-censorship-and-user-notification-lessons-thailand

#5yrsago 1Password’s new travel mode locks you out of your accounts while you’re travelling and crossing borders https://blog.1password.com/introducing-travel-mode-protect-your-data-when-crossing-borders/

#1yrago How the Sacklers rigged the game https://pluralistic.net/2021/05/23/a-bankrupt-process/#sacklers

#1yrago How the filibuster dies: Lessons from Adam Jentleson's "Kill Switch" https://pluralistic.net/2021/05/22/not-with-a-bang/#theory-of-change

#1yrago Debunking the arguments for vaccine apartheid https://pluralistic.net/2021/05/21/wait-your-turn/#vaccine-apartheid


🕛 Colophon

Today's top sources: OnIsShows (https://twitter.com/OnIsShows), Naked Capitalism (https://www.nakedcapitalism.com/).

Currently writing:

* Some Men Rob You With a Fountain Pen, a Martin Hench noir thriller novel about the prison-tech industry. Monday's progress: 520 words (7162 words total)

* The Internet Con: How to Seize the Means of Computation, a nonfiction book about interoperability for Verso. Friday's progress: 518 words (3753 words total)

* Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. Yesterday's progress: 508 words (92849 words total) - ON PAUSE

* A Little Brother short story about DIY insulin PLANNING

* Vigilant, Little Brother short story about remote invigilation. FIRST DRAFT COMPLETE, WAITING FOR EXPERT REVIEW

* Moral Hazard, a short story for MIT Tech Review's 12 Tomorrows. FIRST DRAFT COMPLETE, ACCEPTED FOR PUBLICATION

* Spill, a Little Brother short story about pipeline protests. FINAL DRAFT COMPLETE

* A post-GND utopian novel, "The Lost Cause."  FINISHED

* A cyberpunk noir thriller novel, "Red Team Blues."  FINISHED

Currently reading: Analogia by George Dyson.

Latest podcast: About Those Killswitched Ukrainian Tractors: https://craphound.com/news/2022/05/19/about-those-killswitched-ukrainian-tractors/

Upcoming appearances:

* ABC Copyright Conference keynote (University of Western Ontario/London), May 25

* OpenJSWorld (Austin), Jun 8

* UK Competition and Markets Authority Data Technology and Analytics conference (London), Jun 15-16

* A New HOPE (NYC), Jul 24

Recent appearances:

* Privacy is the New Celebrity

* Revolutionizing Activism — The Power of Utopia (Center for Artistic Activism)

* A Little Patience and a Lot of Tape (This Week in Tech)

Latest book:

* "Attack Surface": The third Little Brother novel, a standalone technothriller for adults. The *Washington Post* called it "a political cyberthriller, vigorous, bold and savvy about the limits of revolution and resistance." Order signed, personalized copies from Dark Delicacies https://www.darkdel.com/store/p1840/Available_Now%3A_Attack_Surface.html

* "How to Destroy Surveillance Capitalism": an anti-monopoly pamphlet analyzing the true harms of surveillance capitalism and proposing a solution. https://onezero.medium.com/how-to-destroy-surveillance-capitalism-8135e6744d59 (print edition: https://bookshop.org/books/how-to-destroy-surveillance-capitalism/9781736205907) (signed copies: https://www.darkdel.com/store/p2024/Available_Now%3A__How_to_Destroy_Surveillance_Capitalism.html)

* "Little Brother/Homeland": A reissue omnibus edition with a new introduction by Edward Snowden: https://us.macmillan.com/books/9781250774583; personalized/signed copies here: https://www.darkdel.com/store/p1750/July%3A__Little_Brother_%26_Homeland.html

* "Poesy the Monster Slayer" a picture book about monsters, bedtime, gender, and kicking ass. Order here: https://us.macmillan.com/books/9781626723627. Get a personalized, signed copy here: https://www.darkdel.com/store/p1562/_Poesy_the_Monster_Slayer.html.

Upcoming books:

* Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid, with Rebecca Giblin, nonfiction/business/politics, Beacon Press, September 2022

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