Facebook Fiasco
Facebook's IPO (initial public offering to the U.S. stock exchange) again has made evident the extreme institutional weakness of stock-market placements, even in theoretically controlled markets such as the U.S. market. Protected by Morgan Stanley, Goldman Sachs and JPMorgan, Facebook's stock rose as high as $45 per share on the Nasdaq on its first day of trading, but in the next three days fell below $30. Strictly speaking, the IPO has been a fiasco for investors and a concern for regulators. Many of them have found themselves trapped in a downward spiral and in an atmosphere of mistrust that once again has spread over the stability and the financial future of technology stocks.
The question that, of course, only the U.S. Department of Justice could answer is whether Facebook's IPO could be considered, in whole or in part, a fraud. Without going into too much detail, the operation has all the features of an induced overvaluation in the output stock price — corrected overvaluation with a decrease in the price that has blown a lot of money from big and small investors. The main incentive of the overvaluation — perverse in this case — is the pressure of the dealer banks that are eager to reach high output stock prices to collect their commissions. The initial valuation ($38 per share) was almost 100 times more than the company's first quarter income.
Many investors seem to have drawn the appropriate conclusions from the collapse of the “dot-com bubble” at the beginning of the century and decided to reject the valuation of the company at that price. As the market inclines to phones and tablets, Facebook does not have a guaranteed number of advertisers. This mistrust, miscalculated or ignored by the banks that led the underwriting, along with other parallel decisions — such as General Motors' announcement that it will stop advertising with Facebook — explain the stock market fiasco. Evidently, this has not affected Zuckerberg's finances or the placement entities.
So the Facebook fiasco and — although with a very different nature and impact — the Bankia fiasco confirm that market regulators should make an effort to change the perverse incentives that encourage the overvaluation of stocks and, ultimately, financial bubbles.
The question that, of course, only the U.S. Department of Justice could answer is whether Facebook's IPO could be considered, in whole or in part, a fraud. Without going into too much detail, the operation has all the features of an induced overvaluation in the output stock price — corrected overvaluation with a decrease in the price that has blown a lot of money from big and small investors. The main incentive of the overvaluation — perverse in this case — is the pressure of the dealer banks that are eager to reach high output stock prices to collect their commissions. The initial valuation ($38 per share) was almost 100 times more than the company's first quarter income.
Many investors seem to have drawn the appropriate conclusions from the collapse of the “dot-com bubble” at the beginning of the century and decided to reject the valuation of the company at that price. As the market inclines to phones and tablets, Facebook does not have a guaranteed number of advertisers. This mistrust, miscalculated or ignored by the banks that led the underwriting, along with other parallel decisions — such as General Motors' announcement that it will stop advertising with Facebook — explain the stock market fiasco. Evidently, this has not affected Zuckerberg's finances or the placement entities.
So the Facebook fiasco and — although with a very different nature and impact — the Bankia fiasco confirm that market regulators should make an effort to change the perverse incentives that encourage the overvaluation of stocks and, ultimately, financial bubbles.