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Blaming the IPO Market for Lack of Jobs


If companies can't raise capital, they can't hire.

The declining number of IPOs launched in the US is the "choke point" in job creation, a US Senator believes.

The number of IPOs fell to 62 this year from 874 in 1996, the busiest year on record. In 2008 -- a bad year for the market -- there were 50 IPOs, down from 277 in 2007.

The US Bureau of Labor Statistics said the nation had about 108.5 million private, non-government jobs available in September 2009. Sounds good except for one thing: It's about the same number of private jobs that were available in June 1999, despite about 9% population growth. The recession, which began in December 2007, has resulted in about 7 million layoffs.

"I am deeply concerned that there is a choke point in our efforts to return to economic vibrancy, a choke point that can be found on Wall Street," Senator Ted Kaufman, a Delaware Democrat, said Wednesday in speech in the Senate. "Our capital markets, which have long been the envy of the world, are no longer performing one of their most essential functions: The constant and reliable channeling of capital through the public sale of company stock -- known as an initial public offering -- which small companies use to innovate, and most importantly create jobs."

He's onto something. Initial jobless claims increased by 7,000 to 480,000 for the week ended December 12, from a revised 473,000 the prior week, the US Labor Department said. The unemployment rate is now 10%, down from 10.2%. Despite what may be a bottoming out of unemployment, don't look for a rebound soon.

Congress appears to be moving in the wrong direction. After President Obama's $787 billion stimulus package failed to goose the economy and unemployment climbed, the House of Representatives on Wednesday voted to spend another $155 billion on "shovel ready" construction projects. Sound familiar? What's new is that the bill also seeks to avoid layoffs of public employees, including teachers and cops.

Kaufman said the private sector creates most new jobs and notes that 92% of job growth in a start-up occurs after a company goes public. He said 17 venture-backed companies raised $367 million in the IPO market prior to the current Wall Street crunch and now employ 470,000 people. He said a robust IPO market would have created as many as 10 to 20 million "high quality" jobs.

Kaufman argued that the majority of such promising and once small new companies, including Intel (INTC), Yahoo (YHOO), Oracle (ORCL), and Dell (DELL), wouldn't be able to go public today.

One reason: The IPO market now demands established companies such as Visa (V), which went public in 2008, and often shuns unproven companies in a new sector.

Kaufman said some underwriters that specialized in IPOs for small companies during the boom years no longer exist, including Robertson Stephens, Alex Brown, Hambrecht & Quist, and Montgomery Securities. True, but it's not like major houses run screaming into the night at the mere mention of an IPO.

"Structural changes in the US capital markets dealt the coup de grace," Kaufman said. "We created new order handling rules, decimalization, which shrank spreads significantly and made it increasingly difficult for traditional brokers to remain profitable."

It's hard to see decimalization as the villain, but Kaufman said Wall Street now thrives on "high frequency trading" and is less interested in raising capital for new companies. He said new companies have been shed from NASDAQ (NDAQ), the New York Stock Exchange (NYX) and American Stock Exchange faster than they've been created, noting that the market has gone from almost 7,000 publicly listed companies in 1991 and nearly 8,900 in 1997 during the dot-com bubble, to 5,400 in 2008. Sure, but many promising companies are bought by larger rivals -- a good thing for investors -- and some companies flop. Global Crossing, anyone?

"The United States is practically the only market in the world where this is occurring," Kaufman said. "The major stock exchanges in Hong Kong, London, Milan, Tokyo, Toronto, Sydney, and Frankfurt have all grown from their 1997 levels."

China is hot territory for IPOs, raising about $52 billion so far this year on exchanges in Hong Kong and the mainland, compared with about $24.6 billion in the US. The reasons: The lure of solid growth and perhaps negative fallout from Sarbanes-Oxley.

"How can we create a market structure that works for a $25 million IPO, both in the offering and the secondary (market)? If we can answer that question, this country will be back in business," Kaufman said.

Meanwhile, let's all fret about executive pay and Wall Street bonuses.

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