Fantex: One Born Every Minute
Felix Salmon had a hilarious (if perhaps not intentionally so) column the other day detailing the ludicrous reality behind Fantex, the heavily hyped company putting together an “IPO” of Arian Foster. It is basically securitizing Foster’s earnings – giving him $10 million in exchange for a 20% claim on future earnings, and selling off the shares. The entire idea is ridiculous on a number of levels, even before the extremely shady aspects of it unrelated to the core investment. As Salmon details:
In reality, however, there are even more non-Foster risks to this stock than there are Foster risks. Your stock, for instance, can only be traded on an exchange which is owned and operated by Fantex. The directors of Fantex can, at their sole discretion and at any time, convert all your Foster shares into common Fantex shares, at any ratio which they determine to be fair. Or, more realistically, they can just go bust: after all, as the prospectus notes, they have no experience in this business. And if they go bust, then the holders of the tracking stock will end up owning about 1% of a bankrupt company, no matter how successful Foster is.
In other words, when the directors decide “to reattribute assets, liabilities, revenues, expenses and cash flows”, their duty is to Fantex, the holding company, and not to the chumps with the Foster shares, who between them account for less than 1% of Fantex’s equity. And in general, as the prospectus also says, “any of our tracking series will be subject to the risk associated with an investment in Fantex as a whole”.
Yglesias remarked the other day, in a different context, that the whole idea of efficient markets implies massive market failures. If beating the market is impossible – and it’s close enough that individuals should look at it this way! – then why is the wealth management business as fantastically large and profitable as it is. If markets are basically efficient, then it’s obviously pretty foolhardy to be putting your money into Fantex or paying a hedge fund manager 2-and-20 to manage your money. In other words, given the empirically-shown efficient market hypothesis and the empirically-shown popularity of crappy investment products we can reasonably conclude that people make highly irrational investment decisions. As Yglesias suggests, one could then say there’s a strong case for paternalistic regulation in financial services.
It might make more sense to adopt a harm-minimization approach here – rich people ripping off other rich people simply isn’t a top policy priority. People will very likely lose their shirts on the Fantex deal, and they’re also most likely people with more money than sense. Compared to the harm that is done by payday lenders, shadowy mortgage dealers, or any other of an array of predators targeting the poor, regulating wacky investment products seems like an area of relatively low-percentage gains in social welfare. If you’re looking at how to actually improve social welfare with securities regulation, I would imagine the greatest bang for your buck by far is in reforming 401(k)s. The one thing you wouldn’t want to do is loosen “accredited investor” laws that allow shady financial products to market to less well-off consumers.
It’d be a shame if we just passed a major bipartisan bill to do precisely that. Allowing general solicitation for alternative investments seems like such a horrible idea that it’s hard to imagine anyone in good faith could support it.