The Government is regulating the “Little Guys” into a lower financial class. By Little Guys I mean individual investors with less than $1mm in assets. By lower financial class I mean these Little Guys can’t invest in a multitude of financial services products that are available to the Rich Guys.
The meltdown of the financial markets and ensuing finger pointing are exacerbating the problem. The Government wishes to add even more regulations to protect the People from the demons in the Financial Industry and from themselves. The limitations on how and where the Little Guys can invest have been put in place to protect these would-be drunken sailors from financial oblivion. The regulations prevent or prohibit the Little Guys from investing in Alternative investments and performance-based investment funds. Of course, they can go out and borrow 5X their potential take home income for the next 20 years to buy a house. The Government believes that that’s good for America, especially the Little Guys. But it’s bad for the Little Guys to lose money playing on the Rich Guys turf. Is that because they’re not smart enough? Or is it because they can’t afford to lose money? Or is it because it’s the easiest way to prevent those that are less intelligent, more naive or pathological? I think the issue is that the Regulators find it easier to use a broad brush of regulation to protect the People rather than apply narrower and more intelligent brushes. That means that while the top 1% of the population have access to myriad financial products and opportunities, the other 99% does not.
The term “alternative” has been soiled by the financial meltdown. The smart guys on Wall Street hoodwinked the not so smart guys that were supposed to watch them. These very same Regulators that were asleep at the financial switch are responsible for making sure the Little Guy doesn’t get conned by the financial hucksters on Wall Street. So no performance-based managers or hedge funds, no private placements, no access to endowment-like funds. If you are going to blow your life savings, do it on “Conventional” investments like buying stock in Fannie Mae, or AIG or GM. Yes, buy a house with a big mortgage and buy stock in GM and AIG.
If all of these Alternative investments were evil, why would rich people invest in them? Why wouldn’t the government prohibit rich people from losing their fortunes in these financial product? The answer is because it’s easier to regulate the 99% by prohibiting them from investment opportunities because the Government doesn’t want to take the risk that someone loses their house or goes bankrupt because they went “all-in” with an alternative investment. Of course, they can bet their house on conventional stocks or go to the local casino and lose their shirts with less than $1mm in assets.
Is it possible that regulations that protect the Little Guy actually keep the little guy down? Little Guys can’t do what the rich guys do. Not because they don’t have the intelligence or assets, but because the government won’t let them. They are being protected against themselves. Why can’t a high school professor or electrician or fireman with $75,000 in savings invest some portion in alternative investments? They could be quite sophisticated and savvy when it comes to investing their money. They could possess the restraint and discipline to not bet the farm a speculative investments. I know lots of people with assets under $1mm with good investment sense. They have the presence of mind to limit their investments, diversify, and even protect themselves against volatility and financial risk. Couldn’t they be trusted to only invest what they can afford to lose? Shouldn’t they be given a chance to invest in financial products that have made the Rich Guys loads of money? Yes, they have also lost the Rich Guys loads of money over the last year. Much of what was lost was tied to lunacy in the mortgage and debt markets. Institutional Investors lost their minds and overleveraged against bad assets. The result was pandemonium. Guess what, the Little Guy was hurt just as much on a percentage basis in terms of asset value because their 401Ks, and Mutual funds were heavy into Fannie Mae, GM, etc and their home equity is gone. Guys like Barney Frank encouraged the Little Guys to concentrate 75% of their net worth in their heavily morgaged houses.
Why is it safe for the Little Guy to taste the forbidden investmnent fruit now? Well for one thing, the shit has already hit the fan, and while it may still be flying around, it’s built in to the market now. That’s another way of saying that this might be a good time to get into the market. Including the Rich Guys’ market.
Why do I care? Because I don’t think it’s fair that people with less than $1mm in assets are prohibited from investing in financial products that can make them money and protect their assets. Of course I don’t want financial “bad guys” and con men to be able to take advantage of average citizens. If they do, and get caught, they go to the “big house”. We have regulations (laws) against people being defrauded, stolen from, and abused. What I do want to see is a democratizing of the investment space. I want to see new transparency and openness. I want to see people gain access to a broad array of investment opportunities that can help them to build their fortunes. I want to see Little Guys tap into the best performance-based managers. I want to see little guys have a chance to invest in private companies with the potential for huge, life-changing returns. In short, I want the other 99% to have access to the same investment opportunities that the 1% enjoy- even if they don’t always bring joy. How can alternative investments become accessible to everyone? There are three options: a) deregulation, b) re-regulation, c) more regulation and d) intelligent regulation. I prefer “d”. What I propose as intelligent regulation will be the subject of the next blog post.
