PSPC renews ancient history – Twin Cities


The Old Testament “preacher” who wrote in Ecclesiastes that “there is nothing new under the sun” lived in the days before the financial markets. Yet his words hold true and apply to them nonetheless.

Edouard Lotterman

News that former President Donald Trump could use a PSPC investment platform to launch his alternative social media system reminds economists of a historic leaning of a similar episode in 1720 – and others during the story – which were pretty much the same dodge. There is nothing new under the sun.

Don’t know what a PSPC is? Me neither six months ago. But, just like you don’t notice red Toyota RAV4s until you buy one and then run into 20 a day, PSPCs are now in the financial news on a daily basis. The acronym stands for Special Purpose Acquisition Company, also known as “Blank Check Company”. Starting a company creates a listed company listed on the stock exchange.

But this is not a normal initial public offering, or IPO, of shares for an existing company that has grown to where it needs capital beyond what the banks or venture capitalists may offer – companies that are “moving companies” in accounting terms. These traditional IPOs involve a myriad of disclosures and regulatory filings. A PSPC does not. Indeed, that is the whole point of all the effort – to avoid filing relevant data with securities regulators to disclose information to potential investors.

Instead of starting a business making products, like medical devices or electric cars, or software like search engines and social media, or services like Uber or UnitedHealth, a PSPC, once formed, is not than a pot filled by investors, which is intended to be used to buy an existing business in the future.

The target company is generally large. These vehicles are not designed to buy a grain elevator in Pipestone or a jazz club in Fridley. Usually the target is a company incorporated, but whose shares are not publicly traded. In many cases, this is a business that has already been traded and listed on a stock exchange, but was subsequently “private” through a leveraged buyout.

The Securities and Exchange Commission said, “A SPAC is created specifically to pool funds to fund a merger or acquisition opportunity within a defined time frame. The opportunity has generally not yet been identified. Wink wink!

That last sentence is just an “air banter” to use the words of Mr. Peabody, an unlikely historian and advisor to Rocky the Flying Squirrel. The opportunity is generally well known and whispered where it is common knowledge. It’s just that nothing is said on the record.

If Trump comes up with stock in a SPAC that all the news media describes as a vehicle for a self-glorifying new social media platform, no one is going to say “the opportunity has yet to be identified”, even though in this case, the target company does not yet exist.

Yet it is this same phrase “yet to be identified” that tickles the memory of those who have a penchant for history – and madness.

The early 1700s saw a series of frenzied financial bubbles in France and England resulting from the sale of shares in new, and almost always fraudulent, firms, such as the “Compagnie des Mers du Sud” and the Compagnie du Mers du Sud. 1717 by John Law – a business opportunity for the French colonies.

In 1720, the Daily Post in London published an advertisement offering shares in “A business of great advantage, but no one to know what it is.” It quickly became a prime example of the gullibility of the public and the ease with which people can be tricked into investing in fraudulent businesses. Charles McCay included it in his classic exhibition on “The Extraordinary Popular Delusions and the Madness of Crowds,” as have other authors. It is cited in a myriad of economics and finance textbooks.

Researchers wonder if the Daily Post’s ad was initially a travesty, or if someone actually lost a lot of money. Some reports say that the usurper returned all small deposits deposited by willing bettors.

Yet the similarity between investments offered to the public as an “opportunity yet to be identified” and “a business … no one to know what it is,” three centuries ago, should frighten sane people. It certainly does to me!

Why were PSPCs invented? What previously unmet need are they meeting? All observers agree that their sole raison d’être is to avoid openly disclosing information to potential investors and to avoid filings with regulators. It is madness to the power of n.

Securities regulation exists precisely because the unregulated securities markets were teeming with overkill scams or camouflaged risk-taking that harmed the public again and again. The 1920s and the resulting Great Depression taught this to our ancestors.

“Financial engineers” come up with one financial instrument after another that is supposed to spread risk and make capital flows more efficient. The stock pools managed by traders like Joe Kennedy were an example of the 1920s. And think back to 2007, when there were investment funds whose only activity was to hold shares in investment funds. who held shares in investment funds that had turned mortgages on mobile homes into marketable financial securities.

The same “preacher” who wrote Ecclesiastes also wrote the earthy aphorism, “As a dog returns to its vomit, so a fool repeats his folly. This describes well the investors and experts who repeat the same mistake every ten years or so.

Former Fed Chairman Alan Greenspan wrote a book praising ingenious new derivative securities that would spread the risk on those who were most willing to take it and lower the cost of mortgages and other borrowing for the rest. of us. It 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 of secured debt collapsed. These derivatives did not identify and spread the risk as promised, they masked and concealed it.

The Economist, the august British news weekly, recently hailed PSPCs as promising new and greater flexibility. Take it like “get in the lifeboats boys, she’s going to sink!”

The danger here is not specific to any Donald Trump business, although his abuse of those who lend to him has become legendary. PSPCs aren’t the only risk for flashing laser-like warning signs, either – the current wave of offers of cryptocurrency and other virtual instruments whose value is determined only by those who hold them. create can join Law’s Mississippi program and the South Sea Company in the dusty corners of financial history. But in the short term, they have the potential to cause a lot of pain and suffering.

Also remember that we are in inflated markets resulting from 13 years of unprecedented low interest rates and government stimulus. The simple act of slamming a door can trigger panic and a fatal rush for exits. Let’s not go around firecrackers in the meantime.

St. Paul’s economist and writer Edward Lotterman can be contacted at

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