If you bought shares in Facebook (Nasdaq: FB) on its first day of trading, you have good reason to be angry, as the company's investment bankers rigged the initial public offering process to ensure you'd lose money. And you now have -- after opening at $42, shares in the company are currently trading for less than $28, a decline of over 33% after only eight days of trading.
A perfect Wall Street parable
When I first read about Wall Street's role in the orchestrated Facebook debacle, I imagined Lloyd Blankfein, the CEO of Goldman Sachs (NYSE: GS), dressed in a skin-tight, red pleather jumpsuit, dancing amid moon rocks, and singing to the lyrics of Britney Spears' masterpiece, Oops!... I Did It Again.
While I was initially repulsed, as I'm sure you are, at the thought of Mr. Blankfein defiling such an important memory from early adulthood, the more I considered it, the more I realized how genuinely he'd be able to sing the lyrics.
Consider the first stanza:
I think I did it again
I made you believe we're more than just friends
Oh baby
It might seem like a crush
But it doesn't mean I'm serious
'Cause to lose all my senses
That is just so typically me
Oh baby, baby
More than just friends?
In the last 12 years alone, Goldman Sachs and other Wall Street firms have made us believe they're more than just our friend on multiple occasions, only to mash the budding relationship into the ground.
- In 2003, 10 of the largest investment banks in the United States -- including Goldman, JPMorgan Chase (NYSE: JPM), and Merrill Lynch (now a part of Bank of America (NYSE: BAC)), among others -- admitted to issuing fraudulent research reports to inflate the value of their clients' IPOs.
- In 2007, emails between Goldman bankers show how the firm created financial instruments designed to fail and then sold them to clients in the now-infamous TimberWolf deal
- In October of last year, Rajat Gupta, one of Goldman's directors was arrested on charges of insider trading.
- In November of last year, Goldman underwrote the disastrous Groupon (Nasdaq: GRPN) IPO after the daily deals website over-reported its revenue by a factor of two.
- In March of this year, a departing Goldman executive penned an op-ed in The New York Times revealing that managing directors at the firm regularly referred to their clients as "muppets."
- And just this month, after attacking the proposed Volker Rule as unnecessary, which bans federally insured banks from proprietary trading, Jamie Dimon, the CEO of JPMorgan, was forced to acknowledge that this very behavior had cost the bank's shareholders over $2 billion in losses.
Indeed, like the fawning astronaut in Britney's video, one would have thought investors had learned their lesson by now. But evidently not.
As my colleague Eric Bleeker noted in one of the year's most popular articles, at the same time that Goldman was underwriting Facebook's IPO, it was also lending out shares to short sellers who "were likely acting on the knowledge [possibly acquired from Goldman bankers] of Facebook estimates that were reduced downward just days earlier -- again, information that was only selectively disseminated and wasn't known by the average individual investor racing to buy Facebook shares."
Wall Street is not that innocent
As I see it, there are two lessons from the Facebook IPO.
First, run in the opposite direction anytime somebody insinuates a change in paradigm. Revenue, sales, and other traditional valuation metric were discarded during the dotcom bubble in favor of measurements such as "eyeballs" -- that is, page views -- only to be adopted again once the dust finally settled. The same can be said of Facebook. At the IPO price of $38, the social networking giant was valued at 97 times earnings despite the fact that nobody knows for sure how it intends to monetize its user base.
Second, be wary of anything, and I mean anything, in which you're competing against Wall Street for a piece of, as they see it, their pie. The investment banks on Wall Street didn't float Facebook's IPO so individual investors could get rich. They did it so they could get rich, collecting an estimated $100 million in underwriting fees.
As Britney so presciently puts it in the chorus:
Oops! . . . I did it again
I played with your heart, got lost in the game
Oh baby, baby
Oops! . . . You think I'm in love
That I'm sent from above
I'm not that innocent
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