Thursday, May 31, 2012

Facebook Fatuousness


I'm knee deep in self-help books and thus, a kindler, gentler me is emerging. I've been keeping up with the bloviator's commentary on the Facebook IPO and sigh (reminiscent of Ronald Reagan responding to Jimmy Carter) "there they go again."

Your friend Joe Nocera wrote in his column how bankers set the price of Facebook. Sorry Joe. The Market sets the price. Buyers submit bids, sellers (Facebook) submit its offers and the bankers try to determine where the market will clear. And yes. It does work that way. So next time you read the bankers messed up by setting the price wrong, remember, the Market, not bankers set the price. And it matters. Most of the columnist who assert the bankers set the price are implying there is some sort of market manipulation that is taking place that can be solved with smart regulation. But if you've characterized the "problem" incorrectly, you are less likely to come up with a smart solution.

There has been some gnashing of teeth that analysts didn't inform all of their clients about changes to estimates. This is rich. After the Internet bubble Eliott Spitzer, at the time Attorney General for the State of New York entered into a "global settlement" with the major investment banks that changed among other things analyst's involvement in an IPO. Spitzer, and others, characterized the problem of the Internet bubble as one caused by exuberant analysts hocking worthless IPOs. Their solution was to remove the analyst from the process. Part of that removal was restricting analyst's communications with investors during the marketing of the IPO. Analysts can't make outbound calls to investors. So if an analyst has a piece of information that is germane to the pricing of the IPO, the Spitzer rules virtually ensure information will not flow to investors. The analyst is now very careful about giving out information for fear of running afoul of the law. And yes, that is how it works.

I read someone, in the Wall Street Journal, of all places, complaining analysts were calling clients on the phone in order to relay information. The phone call was portrayed as a nefarious way to transmit information. See the above paragraph. Analysts can't make outbound calls. It's considered marketing the deal. And the Spitzer rules were promulgated to prevent analysts from marketing deals. The characterization that analysts were making calls to client, is one, wrong. Secondly the Securities Act of 1933 prevents ANY written document, other than the prospectus, to be used to market the deal. An analyst, broker, banker that works for the bank underwriting the deal can only send the prospectus to the investor. Anything else is illegal. Oral communication is the only way to communicate changes. The Securities Act and Spitzer determined information is bad, so they restricted information. Some investors getting information and others not is a direct result of the laws that were explicitly designed to prevent the free flow of information. The laws have succedded.

The little guy was again screwed over by the Fat Cat Wall Street Banker. I love this one. All of the complaints I've seen on this issue come from clients of Schwab, eTrade, T.D. Ameritrade and the other discount brokers. Here is the value proposition of the discount broker: "Customer doesn't need useless things like research, so trading costs less." Nothing wrong with that. But if you don't pay for research, don't complain you aren't getting it.

We've written a few times about unintended consequences. Some of the problems with the Facebook IPO are unintended consequences of prior laws. But politicians are too craven to admit that. Instead they'll look for scapegoats, come up the wrong problem, pass the wrong law and 5, 10 or 20 years later go through the whole process again. Can you say Dodd-Frank? Affordable Care Act?


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