MF Global, while crashing and burning, lost $1.6 billion – at least that’s what appears to be missing. JP Morgan, for reasons they don’t quite understand, lost $3 billion – by the most recent estimate. And now Morgan Stanley has lost at least $18 billion – but this doesn’t count because it was Other People’s Money (OPM).
There has been no bigger joke on Wall Street than the Facebook initial public offering (IPO). From the beginning up through the sorry slide it’s on today, nothing has worked. There is even a likely Securities and Exchange Commission (SEC) investigation into revised earnings information that somehow wasn’t shared with the public – but a few insiders had a peak at.
If you ever needed proof that big investment banks are nothing but leeches sucking the life out of our economy, Facebook’s IPO is it.
It’s not as if Facebook is worth nothing, given that it does have a $4 billion in sales every year with pretty low overhead and a pool of 900 million users worldwide. The problem is that this works out to $1.21 in revenue per user, an incredibly low number. The trick is whether or not Facebook can grow in a way that makes more off of each user, which is why it paid the insane price of about $1 billion in cash and IPO stock for instagram – they weren’t buying the product, they were buying the talent. They need people who understand mobile apps and they need them fast.
But for all the potential for Facebook to grow and make something more from their installed base than a series of pretend farms, there is huge risk. They haven’t done it so far and there is little reason to believe that they will really be able to cash in on what they have. So how did Morgan Stanley and their friends at JP Morgan and Goldman Sachs handle that for the IPO?
They relied on hype. And they apparently were so busy slapping together the hype they never released the updated revenue figures (not good looking), never figured out how shares would be allocated, never found out how it might overwhelm the NASDAQ exchange, and never tried to figure out how many shares the market could actually hold.
Was that JP Morgan, the investment bank, or Captain Henry Morgan, the notorious pirate?
You might call this a deliberate lie, a deception. Given the way these firms operate, it seems to be something much more sinister. It appears that they never really cared if they were selling a product with any value, the standard operation these days. It was all, as Henry Blodgett called it on CNBC, “Muppet bait”, a reference to Greg Smith’s resignation letter from Goldman.
The technical term for when someone doesn’t even care enough to craft a decent lie is “Bullshit”.
Why should anyone care? After all, the financial world is awash in trillions of newly printed dollars – so a few billion here and there is hardly worth worrying about. Compared to the $700 trillion in derivatives estimated worldwide, about 14 years of the entire product of this planet, $18 billion is what a bank like JP Morgan would see fall into the cushions of the couch. It’s on the order of 0.01% of their entire exposure.
Of course we should care because these games are being played with money that, in the right hands, could be doing amazing things that transform the economy and put people back to work. It could feed families, rebuild neighborhoods, and instill new optimism and pride. A few billion here and there may not be much to them, but to the rest of us it can change the world.
This time, they didn’t just lose piles of money on obscure trades no one understands. This time, they fleeced ordinary folks with real cash that could have fueled real dreams. This time, they crossed the line. This time it was nothing more than a con job.
To compare Wall Street to a casino is unfair – to casinos. An entire generation is growing up deeply sure that stocks are nothing but a con.
Too Big to Fail? Long gone. Too Big to Understand? It’s been a serious problem. What we have now is Too Big to Tolerate.
It is time to destroy the big investment houses before they destroy us.
Barataria - The work of Erik Hare 
Rock
On
Brother!
(I love it when you get pissed off!)
Thanks. This is seriously bad stuff and it has to stop.
11 years ago I tried my hand at putting some money in the stock market. I had shares bought for companies that I liked and shares for companies that I thought might perform well.
The inability then to see real-time news on some of the companies caused me to buy shares in a company that had declared bankruptcy at 9am (i purchased stock in it at 9:15am that day).
It wasn’t a lot of money, but the inability for me to reliably keep an eye on only $500 diversely invested was enough for me to pull out completely.
Oh, and after six months of having that $500 in the market I was left with $400. This doesn’t include the $15 transaction fees necessary to buy or sell the shares which I couldn’t group together.
So yeah… except for my 401k I’ve got nothing in the market. However, I am investing in real people using Prosper for microloans. I’ve put $100 in to just play around with and have seen a 15% return already on my money in 8 months. Repaid principle/interest money then gets reinvested. I’m sure i’ll hit speedbumps in time with this approach as well, but at least I know/understand what’s going on.
Thanks for that, one Hell of a story. No less than Warren Buffet advises that people should invest in what they can see, so locally based microloans do seem to be a great way to go. They also go to very small businesses, the ones that have the most potential for expansion. So it’s a big win-win all around.
Good luck, I think you are seriously on to something!
Investment banks exist for a reason, but if they aren’t doing their job they should be squashed so there is room for new ones to spring up. It’s like cutting down the big trees in the forest. If that has to happen than it should. I don’t know that it has gotten that bad that we have to do something radical but if the stock market appears totally rigged which it does than someone has to step in.
This IPO has been a total disaster and heads need to roll for it, there is no doubt.
I’m starting to think of this like trust-busting from a century ago. Your analogy of a forest is a very good one, and it was proven to be the way to go when Teddy Roosevelt took it on. These guys do not generate capital, they incinerate it. They are worse than useless.
This IPO really is the last straw – and it’s so public that there is almost certain to be action. Let’s press the issue now, I say. Something does have to be done.
My feeling is that we shouldn’t take our eyes for 1 second off the penninsula of Europe at all
It is disintegrating before our very eyes.
In the 1990s many liberals looked to Europe as a third way between capitalsim and communism. In the 1990s many anticipated the Euro would lead to the EU overtaking the US as an economy. European economic integration occurred because Europe didn’t want to import US inflation. We’ll see in the coming years if surrendering one’s currency really was the solution.
Interesting. I know a lot of people agree with you, including my hero John Mauldin (there, I confessed my source for a lot of stuff!). But … outside of organizing Bretton-Woods II (or is it III?) I’m not sure what else we can do. Bernanke does seem to be willing to give them any resources he can, and already has given them upwards of $2T on a tab.
The spate of lawsuits shows that they probably violated a number of rules we already have in place. The lawyers will pick facebook and the banks clean. It looks like they have it coming too.
No one should put money into the stock market period. But if they lose their ‘muppets’ and the market tanks I bet they will do things different. Then maybe it will come back as a good investment.
In the long run, the market will sort it out, I’m sure. In the long run, we’re all dead.
Regulation is useful for smoothing things out in the short run. While it does look like a lot of rules were at least bent, if not broken, I think it’s a losing battle to regulate companies this far out of control. I agree that if the lawyers pick their bones it could change things, but JPM and GS are so big it’s hard to imagine that happening.
But you do have a common sense good way to look at it, as usual. Thanks!
it took you this long to figure this out? 🙂
I’ll give you this one. 🙂
Seriously, taking these guys on would be a nasty, dirty fight that won’t help us out of the Depression one damned bit in the short run. But I’m starting to think that we’re not getting out of this Depression at all until we do it.
Having met you, I’m willing to stake claim that you didn’t put any money into the Facebook IPO. I didn’t either, but then, even though I don’t understand macroeconomics as well as you do, I’m a relatively well-educated and savvy investor. I read up on the Facebook IPO well before it happened, and it was too risky of a gamble for me.
That said, I’m sure a lot of very intelligent people who are less market savvy expected the next Google or Apple here, and if they were taking their advice from the investment firms, which far too many Americans do, then you are correct in asserting that they were lied to, and that is a problem.
It’s also a problem for people to grow up thinking investing is nothing but a con: investing is and always has been the best way to make money in America. Of course, I use the term investment here very broadly–investment could be venture capital; starting your own business; expanding a business; buying real estate, etc. Fearing the market so much that one leaves his or her money in a bank is equivalent to “investing” in your mattress these days. As a matter of fact, unless you have a lot of money on hand, you may be better off keeping your petty cash in a safe at home rather than at the bank, but that’s an entirely different topic.
Great post, Erik. It is definitely time to do something about the finance monopolies.
Where it stands right now is that it appears a new assessment of income potential at Basefook (my psuedo-cockney name for it) was issued a few days before the IPO at MS. It was clearly not made public, which is a problem for both MS and Basefook, since withholding material information ahead of an IPO is illegal. However, it also appears that the information was indeed shared with some potential investors, which is Insider Trading – much more serious. It’s been further alleged that big names pulling big orders at the last minute had a lot to do with why NASDAQ got behind right at the open of the IPO, which is just outrageous.
So there is a TON to sort out here, but it is definitely true that a generation is convinced that this is nothing but one big con. This appears to go to the nature of K-Waves, once again, and how we define these things called “Generations” that are clearly only a half-generation or so in length. I agree that this is a serious problem for the long haul.
Let’s go to the next level. My generation went to a 401k based on the theory that Social Security was a scam. So what comes next? All you need to do is believe in Secular Market Theory to ask that question, let alone utter, complete dismay in the whole system.
The implications of this are vast and long lasting. They have just eaten the Golden Goose and appear to have no idea how serious it is. This is where a “socialist” like FDR has to come along and save Capitalism from itself – again.
Very serious allegations, indeed. I think many of us saw Obama as and hoped he would be the FDR for this generation. Of course, my grandfather went to his grave cursing FDR, and as the son of a great capitalist, why would he not? Yet the “New Deal” created the era in during which my father and uncles were able to prosper (not quite to the extent that my great grandfather had).
It always does come down to the side of the fence on which one lives though, doesn’t it, and I don’t think the 1% will face the staggering types of losses faced by the elite 80 years ago. Truth: pure capitalism is no more functional than pure socialism.
I need to update my piece on “Marketism”, because I believe we have never been a truly “Capitalist” nation:
https://erikhare.wordpress.com/2008/10/13/marketism/
(4 years old, and has problems)
But we’ve always chosen open access to the market over pure rule by capital/money whenever they came into conflict. It goes way back in our history, from the National Road in 1780s, free schools in 1800s, the National Bank Crisis in 1820s, Homestead act, Sherman anti-trust act, and so on. This is what built our nation – NOT capitalism!
“Was that JP Morgan, the investment bank, or Captain Henry Morgan, the notorious pirate?”
Gold! 🙂
I was trying pretty hard on that one, so I’m not sure it counts. 🙂
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