Facebook Fiasco Is Latest In String Of Paper Asset Failures

By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

Last Friday, Facebook’s Initial Public Offering (IPO) hit the market.  Early Tuesday morning this week, it already looks like another Wall Street snafu.

In the run up to the IPO, the stock had been expected to be priced in the $28 to $35 range.  The original plan was to sell 340 million shares.  In the days before the IPO, the issue price was raised to $38 and the quantity of shares was increased to 425 million.  It looks like most of the incremental shares came from early Facebook insiders who were cashing out (not a good sign during an IPO).

The theoretical plan by the banks underwriting the IPO was that Facebook’s shares would rise 5-10% above the $38 price by the close of the first day of trading.  The stock did open at $42.05 and rose as high as $45 last Friday.  Then the bottom fell out, with the shares trading at $38.23 at the close.  This was an increase of less than 1%.

The news was worse early this week.  It fell all the way to $34.03 at the close Monday.  In early trading Tuesday, the share price touched a low of $30.98.

A new piece of bad news hit the market.  As reported by Alistair Barr of Reuters, Facebook’s lead underwriters, Morgan Stanley, JPMorgan Chase, and Goldman Sachs had cut their revenue projections for Facebook during the time that they conducted their “Roadshow” to promote Facebook in advance of the IPO.  These three underwriters informed a number of hedge funds and major investors before the IPO, but did not share this same information with the investing public.  With this new information, the lack of demand for Facebook shares last Friday is easier to understand.

In order to obtain the underwriting opportunities, the banks agreed to accept only 1.1% of the proceeds of the IPO, which worked out to about $176 million.  In return for accepting such fees, the underwriters guarantee that all of the shares in the offering will sell at the stated price, standing to purchase themselves any shares that might not be bought by other investors.  One researcher, Sam Hamadeh, estimated that the underwriters were stuck purchasing about $380 million of Facebook stock last Friday in order to fulfill their guarantee.

In effect, these banks had to pay out in excess of $200 million above the fees they would receive for the Facebook IPO.  As a consequence, shares of Morgan Stanley, JPMorgan Chase, and Goldman Sachs all fell on Monday.

With the latest expectations being that the previous week’s JPMorgan Chase loss from its derivatives trading will exceed $5 billion instead of the original report of $2 billion, the value of paper assets have again been clobbered by the growing Facebook fiasco.  Don’t be surprised if major behind-the-scenes manipulation tactics are used to support the share prices of the underwriters and Facebook itself for the short-term.  From the US government’s perspective, bailing out these entities is necessary to stem any further panic among investors in paper assets.  Uncle Sam definitely doesn’t want the general public to abandon stocks, bonds and currencies and replace them with purchases of tangible assets like physical gold and silver.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

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  1. In the weeks and months leading up to the launch of the IPO, the majority of experts suggested staying away from FB because it had not figured out a way to generate revenues that supported the kind of valuations that were being thrown around. As a result, informed people knew it was a good idea to avoid this IPO. Why are so many people now surprised that it has been a fiasco? There are no broad lessons here about paper assets in my view, simply a reminder that it is a good idea to do your homework. There was no need to pay lots of money for specialized newsletters, or anything like that, everyone I heard on Bloomberg and CNBC said they thought it would not go well. Also, if the feds can manipulate this sort of thing, they sure did a crappy job of it from September 2008-March 2009.

    • Mr Heller runs the largest precious metals retail outlet in Michigan. Why are we surprised that any market event, no matter how unrelated, is used as an opportunity to support the fear that Mr Heller characterizes. As Mr Golino states, there is nothing surprising in the Facebook IPO performance. It is valued at $100b! Shame on people for not doing their homework and then listening to individuals like Pat rather than taking accountability for their actions.


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