Skip

"The Music Goes 'Round And Around"
May 20, 2012 3:15 AM   Subscribe

Who's the fool in the Facebook IPO?
Anthropologist and journalist Joris Luyendijk speaks to a former investment banker about stress, disillusionment and the strategies behind the Facebook flotation.
The former MD compares it to insurance fraud: "It seems victimless while in reality everyone's premium goes slightly up."
That's the system, he says: a cartel "skimming off everyone's pensions and savings".
posted by adamvasco (51 comments total) 7 users marked this as a favorite

 
I bought my facebook shares through GroupOn.
posted by srboisvert at 4:29 AM on May 20, 2012 [8 favorites]


Huh. Apparently Zuckerburg just married his girlfriend. Obviously just a scam to distract from the IPO failure!

---
But seriously I'm not really sure what the problem is. Is the top article on Google Finance right now: "Facebook Flops: Look Out Below!" .

But looking at the chart, what's the problem? They launched it at $38, and it closed at about $38. It sounds like they did a good job of pricing it. You're not supposed to just give a way billions of dollars of free money to wallstreet. Why would facebook want to intentionally undervalue their stock?

If you look at the price of the stock compared to their initial range it's doing pretty well. Sure, random idiots who didn't do anything other then have a good relationship with their broker because are already rich didn't have the opportunity to make more free money. So what? FB didn't even need the money, apparently - they decided to do an IPO because there was a huge secondary market on their shares already, and it was causing regulatory problems (they had a lot of the same reporting requirements that publicly traded companies did)

Now, maybe the stock will totally crater. Who knows? But making Wallstreet happy isn't Zuckerburg's job. The way the stock is structured he can do whatever he wants he owns 28% of the company, and gets 57% of the shareholder votes.

Not to say he isn't a douchebag, but on a scale of 1-10, wallstreet bankers are like infinity.
posted by delmoi at 4:39 AM on May 20, 2012 [14 favorites]


So who's the sucker in Facebook's initial public offering (IPO) today? Any banker will tell you that there is a fool in every trade, which is why you must always know who the fool is, because if you don't, the fool is probably you.

A range of candidates suggest themselves, of whom the most obvious is Facebook. Earlier this week the New York Times reported that the company is paying the bank Morgan Stanley around $35m for its work on the deal. Practically every other major global bank is in on it, too, bringing the total bankers' fees to an estimated $100m.

Why would Facebook pay so much?


Only two paragraphs in, and already the premise is totally screwed up.
The other side of the IPO "deal" is not the banks, but the mostly institutional investors. The banks get $35m for their service of mediating between the investors and Facebook (Yes, I know, they will probably also pocket a few shares, but let's keep it simple.)

So to stick with the original premise (there's always a sucker in every deal), the sucker must be Facebook or the investors. Unless the "deal" he is talking about is that of retaining the banks for $100m, which is an entirely different deal altogether, namely that of money exchanging hands for buying the services of the banks. Is there a sucker in every transaction of that kind (buying services) as well? If so, then there is also a sucker involved everytime you take a taxi - either you or the taxi driver.
posted by sour cream at 4:47 AM on May 20, 2012 [1 favorite]


It's my understanding, delmoi, that there's a ton of games they play to make sure the stock can't go down after IPO, so the fact that it stayed right at the offering price meant that public demand was very weak. In a non-rigged market, that stock would have gone down a long way, and the bankers would have lost their shirts. But, of course, they get to make the rules, so that that doesn't happen -- only you and I are allowed to lose when speculating.

I read some of the strategies for juicing offerings a few weeks ago, but they didn't stick, so I can't repeat them. Off to read the actual article now, maybe it'll be there.
posted by Malor at 4:49 AM on May 20, 2012 [2 favorites]


Oh hmm, the article is about how bankers took in a bunch of fees for the IPO. People have been talking about that too.

One interesting thing is that when google did it's IPO, it actually did avoid all of that by doing a type of auction on the shares, rather then handing them out in grants to major institutional investors. Facebook could have done the same thing, if they wanted too. But it was very unusual.
posted by delmoi at 4:52 AM on May 20, 2012


The 31 underwriters handling Facebook's IPO will get a fee of just 1.1%, according to a Bloomberg report. That's a much less than the more typical rates of 5 - 6%.

So perhaps that means the underwriters will throw less money into pumping the stock during it's early days of trading?
posted by Lanark at 4:53 AM on May 20, 2012


Unless the "deal" he is talking about is that of retaining the banks for $100m, which is an entirely different deal altogether, namely that of money exchanging hands for buying the services of the banks.
Right, the author actually is talking about the fees the bank gets paid. What are they doing there that's worth $100 million dollars?
posted by delmoi at 4:54 AM on May 20, 2012


Only two paragraphs in, and already the premise is totally screwed up.
The other side of the IPO "deal" is not the banks, but the mostly institutional investors.


Did you RTFA?

Which makes individual investors the true fools? Well yes, but let's not forget the biggest group. Those favours called in by the big banks from institutional investors in exchange for "hot shares" cost money. And whose money is managed by institutional investors like pension funds? Yours and mine.

So, like everyone who has "invested" with their 401k or SEP or whatever money losing prospect you have bought into since 1997 - you're the fool.
posted by AndrewKemendo at 4:56 AM on May 20, 2012


Jesus. As if it wasn't bad enough having to hear endlessly about Facebook before the IPO, now I have to listen to endless stories about the IPO and whether it went well or not? It's not as if this is any news: tech companies and IPOs and the fuckery therein is an old and well-trodden subject about which no one cares at all as soon as a new sexy tech company goes public.
posted by lesbiassparrow at 5:08 AM on May 20, 2012 [1 favorite]


Right, the author actually is talking about the fees the bank gets paid. What are they doing there that's worth $100 million dollars?

Getting people to give Facebook $10 billion dollars. They are salesmen working for 1% commission. That seems like a pretty good deal.
posted by gjc at 5:41 AM on May 20, 2012 [4 favorites]


I invest in companies that, you know, *build* things. What the hell are you guys doing?
posted by The White Hat at 6:24 AM on May 20, 2012 [3 favorites]


All I saw were news stories saying wait to buy this till later. I guess everybody paid attention.
posted by St. Alia of the Bunnies at 6:47 AM on May 20, 2012


delmoi, the issue is that Morgan Stanley had to buy back millions of shares to keep the price from cratering.
Morgan Stanley's reputation as lead underwriter may suffer from the stock market debut of Facebook Inc., whose initial public offering left investors in the largest social network disappointed.

The bank stepped in to prop up the stock from dipping below its $38 IPO price yesterday, said people with knowledge of the matter, who asked not to be identified because the purchases were private. Morgan Stanley, based in New York, was the only underwriter among Facebook’s 33 banks with the responsibility to support the shares, the people said.

Underwriters “are acting like the cavalry to keep this thing going up,” Eric Jackson, founder of Ironfire Capital LLC, said in an interview on Bloomberg Television’s “Street Smart.” “They’re not going to be here a week from now, two weeks from now, a few months from now. It does suggest that there are going to be some rocky waters ahead.”
The institutional investors will get screwed as soon as the underwriters run out of money to support the stock price. And if a FaceBook IPO is the next event that catalyses a financial meltdown, at least we will never again suffer from a shortage of irony.
posted by deanklear at 7:14 AM on May 20, 2012 [11 favorites]


Let's not forget that industrial traders got to sell their stakes first. Most of that $45 share trading wasn't Bob down the hall, it was pump and dump from big investors, including the banks that put the deal together, as many fees are paid with shares that have a lower price than strike.

Someone upstream suggested that the $38 price was artificial, and I think that's true. Fb is absurdly overvalued.
posted by dejah420 at 7:54 AM on May 20, 2012 [2 favorites]


Knowing the sucker in a trade is almost identical to knowing the sucker at the poker table: if you are wondering who it is, it's probably you.

I read something many moons ago that the vast majority of IPOs really only make the underwriters and initial institutional investors the big bucks through fees, etc. The dot.com boom and bust demonstrated this so many times over I'm surprised any retail investors buy in any longer. Oh wait, based on the weak numbers on FB's IPO it would appear that was indeed the case.

Now we get to watch the institutional guys duke it out to see who the loses are.
posted by tgrundke at 8:16 AM on May 20, 2012


Do the customers have yachts yet?
posted by chavenet at 8:18 AM on May 20, 2012 [1 favorite]


So, to recap - the banks were the suckers?
posted by Yowser at 8:46 AM on May 20, 2012


Which makes individual investors the true fools? Well yes, but let's not forget the biggest group. Those favours called in by the big banks from institutional investors in exchange for "hot shares" cost money. And whose money is managed by institutional investors like pension funds? Yours and mine.

So institutional investors (i.e. your pension fund and mine) get to make a killing from an IPO, because they get to buy the shares at the starting price (say, $38) and the first opportunity to dump it when the price rises (to say, $45). Yet they (i.e. you and me) are the ultimate suckers, because once in a while they need to dish out favors to the big banks, in order to get the opportunities to make a killing? Something doesn't add up here.
posted by sour cream at 8:50 AM on May 20, 2012


if you are wondering who it is, it's probably you.

I knew I should have never signed up for that FB account.
posted by box at 9:06 AM on May 20, 2012 [1 favorite]


According to Henry Blodget's article How Goldman Sachs Blew The Facebook IPO in Business Insider, Facebook CFO David Ebersman, told Wall Street how it was going to be rather than the other way around.
[W]hen it came time for the IPO, Ebersman departed radically from Wall Street tradition.

Instead of asking Wall Street for advice on what to do, Ebersman told Wall Street what he wanted.

First, he drafted a complete IPO prospectus himself, with no help from Wall Street.

Then, instead of holding a “bake-off” like LinkedIn, he decided on his own which banks he wanted on the underwriting team, what roles they would play, and how much Facebook would pay them. Once he had made his decisions, he took them to Zuckerberg and Sandberg, who approved them.

And then, in February, a few days before Facebook filed its IPO prospectus with the SEC, Ebersman called the banks, told them what the deal was and what role he was offering them, and asked whether they wanted in.

Not surprisingly, they wanted in
So, yes, the banks were the suckers.
posted by ob1quixote at 9:13 AM on May 20, 2012 [3 favorites]


So, yes, the banks were the suckers.

Suckers for having 100m$ thrown at them for a few phonecalls and ppt presentations?

What's the obligation that the banks have to FB in this case?

I understand that the main role of the bank is to prop up the share price in the beginning, so that it doesn't drop below the emission price. Wouldn't it be the perfect opportunity to roll over that obligation back to FB? "Hey, we would prop up the share price, but all you gave us was 1%. To do a decent propping, we need at least 5%." In fact, isn't that what's happening right now?
posted by sour cream at 9:36 AM on May 20, 2012


I wonder who the sucker was. Hence it is likely me. I did not buy any Facebook stock.

ERGO, STRONG BUY RECOMMENDATION
posted by Flunkie at 9:44 AM on May 20, 2012 [1 favorite]


Its not unusual at all for tech IPOs to drop below the asking price in the week or so after the issue. As I recall, Amazon did that and they were a pretty good buy at that price. An IPO like LinkedIn's is a terrible disaster for the guys that built the company. They got talked into a deal that netted them $45 per share and when the dust settled at the end of the first day, the stock was trading at $94 per share. That's hundreds of millions of dollars that they gave away to brokerage sharp operators. Of course, a month later it bottomed out at $63 per share. However, I don't understand why anyone should think that pricing your IPO at a price where a handful of institutional investors make millions on the first day is some kind of success. In my view, pricing your IPO to maximize the yield to the founders of the firm and to minimize the profits available to insider sweetheart deals is a brilliant success. I think CNBC has it right with Morgan Stanley and Facebook Pull Off a Great IPO. I think Facebook will end up falling 15-20% or so in the next week and I'll be looking to buy once the panicky speculators are almost done bailing.
posted by Lame_username at 10:21 AM on May 20, 2012 [1 favorite]


Any banker will tell you that there is a fool in every trade, which is why you must always know who the fool is, because if you don't, the fool is probably you.

Now, wait just a minute here. I've frequently been told that every market transaction is mutually beneficial -- otherwise, why would both parties engage in it? -- and that it's a commie/liberal mistake to assume that this is a zero sum game.

Are you saying bankers are communists?
posted by weston at 10:29 AM on May 20, 2012 [1 favorite]


Maybe I don't speak British as fluently as I thought, but that article didn't make much of any sense.
posted by elwoodwiles at 10:42 AM on May 20, 2012


Yeah, the Guardian piece wasn't an article as much as it was a collection of fragmented quotes. Maybe this was intended to invoke the frenzied communications within the banking industry.
posted by not_that_epiphanius at 11:23 AM on May 20, 2012 [1 favorite]


I wonder how much of the float MS is sitting on this weekend. The next week's trading in FB will be interesting.
posted by malocchio at 11:35 AM on May 20, 2012


That CNBC article I ridiculous. In the same article they congratulate the underwriters for pricing the stock right while at the same time congratulating MS for doing their job by propping up the price. By this reasoning MS couldn't lose.
posted by bitdamaged at 12:33 PM on May 20, 2012


I want everyone to take note: this is the reason Republicans want to privatize Social Security. You'd think after 2008, that concept would have been thoroughly and totally refuted and debunked. But there are still people out there seriously trying to push for it.
posted by Xoebe at 12:41 PM on May 20, 2012


Sorry, could you explain what this is, and what it means in the context of the FB IPO? And in terms of Social Security?
(I'm in Canada, and I don't remember the details of the SS privatization thing - I just put it down as "Bush/Cheney: probably not a good idea".)
posted by sneebler at 1:00 PM on May 20, 2012


That CNBC article is ridiculous.

CNBC is as ridiculous in print as they are on the air...maybe even more so.

MS went to enormous lengths to support the IPO price, and now I suspect that they are long far more FB than they ever intended. Obviously they expected that the oversubscription would lead to some natural support, but by the looks of it, most of that demand evaporated on Friday.
posted by malocchio at 2:41 PM on May 20, 2012


"Zuckerberg" means "Sugar Mountain".
posted by telstar at 2:46 PM on May 20, 2012 [2 favorites]


Not to say he isn't a douchebag, but on a scale of 1-10, wallstreet bankers are like infinity.

Very interesting statistic. May I ask how many "wallstreet bankers" you actually know?
posted by malocchio at 3:05 PM on May 20, 2012


Isnt it true that MS bought the extra shares through a greenshoe option due to the fact that they actually sold more shares to the public than they owned via naked shorts? A greenshoe is a fairly standard over-allotment agreement that allows the underwriter to increase the number of shares offered by 15% and buy at the Initial price. MS stands to make a ridiculous amount of money on this.
posted by Ad hominem at 4:15 PM on May 20, 2012 [1 favorite]


Not to say he isn't a douchebag, but on a scale of 1-10, wallstreet bankers are like infinity.

Very interesting statistic. May I ask how many "wallstreet bankers" you actually know?


Jamie Dimon, JP Morgan -- douchbag
Lloyd Blankfein, Goldman Sachs -- douchbag
Jon Corzine, Goldman Sachs -- douchbag
Henry Paulson, Goldman Sachs -- douchbag
Vikram Pandit, Citigroup -- douchbag
Sandy Weill, Citigroup -- douchbag
Robert Rubin, Citigroup -- douchbag
Ken Lewis, Bank of America -- douchbag
Brian Moynihan, Bank of America -- douchbag
Philip Purcell, Morgan Stanley -- douchbag
John Mack, Morgan Stanley -- douchbag
John Thain, Merrill Lynch -- douchbag
Richard Fuld, Lehman Brothers -- douchbag
Peter G. Peterson, Lehman Brothers -- douchbag
James Cayne, Bear Stearns -- douchbag
Edward Liddy, AIG -- douchbag

And that's just a few CEOs off the top of my head. A fish rots from the head down.
posted by JackFlash at 4:51 PM on May 20, 2012 [10 favorites]


If my underwriter takes a naked short at my offering price, I'm pretty sure that's the last deal they underwrite.

Maybe I misunderstood, but I can't imagine them taking a naked short above the offering and then covering through the greenshoe. Seems like criminal fraud, but I could be wrong.

due to the fact that they actually sold more shares to the public than they owned via naked shorts?

If this is a fact, maybe you can provide a cite? I haven't read this allegation anywhere else, but it's very interesting if it's true.
posted by malocchio at 4:54 PM on May 20, 2012


Holy crap! You know all those guys?!?

Are you hiring?
posted by malocchio at 4:56 PM on May 20, 2012


I can't name names here... but when I read e.g. Liar's Poker there were many names I knew personally there from my work for A Major Investment Bank... and generally they were, well, people with some serious anger management issues and some serious entitlement issues - what you would call "douchebags".

(Note: haven't done anything like banking in over 20 years. I was young... and frankly, at the time they did actually pay some attention to the law and ethics, I remember the very first lecture I got from my boss was that we had to obey not just the letter but the spirit of the law...)
posted by lupus_yonderboy at 5:06 PM on May 20, 2012


I'm not an expert, that is why I am asking.

The wikipedia article for greenshoe states an underwriter is allowed to engage in naked short sales of an offering by overselling. This option would have been in the prospectus and S-1. In the S-1 it says: We and the selling stockholders have granted the underwriters the right to purchase up to an additional shares of Class A common stock to cover over-allotments.

I am guessing the amount was filed in an S-1A

This article states MS oversold by 63mm shares.

Morgan Stanley et al. sold 484mm shares for $38.00 last night, but only bought 421mm from Facebook. That left them with a 63mm short that they were hoping to cover at $37.582 (the price of the IPO and greenshoe to them) but that it sure looks like they’ve mostly covered at $38.00 – $38.01 today

My company handled this S-1 and I watched it file so I'm more interested in the minutia than usual.
posted by Ad hominem at 5:06 PM on May 20, 2012 [3 favorites]


I guess it is not a naked short since they already have the option to acquire more.
posted by Ad hominem at 5:13 PM on May 20, 2012


Very interesting stuff, Ad Hominem...that is definitely something to ponder. Thanks for the links!
posted by malocchio at 5:30 PM on May 20, 2012


As for the douchebag derail...well, it was a stupid remark, and I should have just ignored it. Sorry.
posted by malocchio at 5:43 PM on May 20, 2012


Ad hominem, that's the most interesting take I've heard on this whole business.
posted by figurant at 10:20 PM on May 20, 2012


For the record, FB is down 12% already this morning, and if the top of the order book is anything to go buy, it'll keep sinking for a bit.
posted by dejah420 at 8:44 AM on May 21, 2012 [2 favorites]


Guys, guys. We just experienced an unprecedented full court press against the Facebook stock, up to and including GM (the second largest IPO ever) dropping this huge bomb about how they're going to up and stop advertising on Facebook.

It's not even subtle how much manipulation is going on. To what end, from what source, now that's the interesting question.
posted by effugas at 2:56 AM on May 22, 2012


Now people are freaking out over amendments to the S-1. Zuckerberg is the winner here, still has 57%, nobody can touch him.
posted by Ad hominem at 1:48 PM on May 22, 2012




I was thinking any kind of investigation is a non-starter. Facebook amended the filings pre-IPO and analysts who were watching reacted. But really, and I don't know the laws about this at all, if the guy down the hall is officially bearish, as in he has the full support of MS in his oppinion, can some other guy In the same company talk the stock up?

I suspect it is not only legal but commonplace.Should there be greater disclosure? Do I need to be a MS VIP to get the truth? It Seems more obvious than ever that outsiders get the shaft.
posted by Ad hominem at 9:10 PM on May 22, 2012


The Big Picture's Barry Rithholz: - How Facebook Fucked up Its Own IPO
This FPP wasn't specifically about Facebook though the discussion has taken it that way.
One of the keys for me was in the second link: -
"The system consists of skimming off everyone's pensions and savings: the banks make money taking a cut between the fund manager at, say, a pension fund, and the vendor (company issuing the shares) … The fund manager makes his money by charging a fee to the pension funds – ordinary people. You get corporations keeping an eye on the chocolate biscuit bill, then paying out huge fees to banks. If they saw how easy most of our work was, they would weep. Why do they put up with the fees? They have no choice, essentially. It's a cartel. And they'd rather pay up than go into business with somebody no one's heard of.
posted by adamvasco at 3:45 AM on May 23, 2012


Yeah I saw a bit of Erin Burnett's show earlier and she was yackking about some lawsuit that's already been filed, which seems fairly absurd to me. Apparently the claim is that Morgan Stanley had access to privileged information or something here's one article, and another:
In particular, the suit claims that Facebook executives told the underwriter banks to lower their revenue projections for the company, and that the banks relayed this information to favored clients but not to the general public.
Anyway, seems like FB took wallstreet to the cleaners for (checks current price) $12 billion. I don't really understand how that could be considered "fucking up". That sounds more like an epic win to me.

Anyway, seems like a perfect illustration of why Zuck didn't want to take the company public in the first place. You end up with a legion of braying jackals jackals flipping out at you about share price and quarterly earnings, who will sell the stock whenever they feel like it anyway.
posted by delmoi at 12:01 AM on May 24, 2012


The Winklevoss Twins, Eduardo Saverin, Wallstreet losers and crybabies suing him after owning the stock for a day. The thing is, Zuckerburg isn't really even that likeable of a guy. But you can't help rooting for him in these fights because the people he's up against are just such colossal douche-bags.

Americans hate Saverin so much now that Senate grand-standers are trying to ban him from the country
posted by delmoi at 12:16 AM on May 24, 2012


« Older Russian Skywalking   |   American "Yaoi" Newer »


This thread has been archived and is closed to new comments



Post