BUSINESS

Morgan Stanley Facebook IPO Fine Will Take The Company 87 Minutes To Pay Off [#WristSlap]

12/18/2012 09:24 am ET

With the kinds of fines bank regulators are handing out these days, it would almost be criminal for a bank not to break the law.

Morgan Stanley on Monday agreed to pay $5 million to settle charges by the top securities regulator in Massachusetts, William Galvin, the latest bitter fruit to fall from the withered tree that is the disastrous Facebook IPO. According to Galvin, the Morgan Stanley investment banker riding herd on the IPO gave some non-public information about Facebook to Morgan Stanley's research analysts (and also the analysts of other IPO underwriters).

Most of you may not remember/care about this, but about a decade ago, banks got into all sorts of trouble over this sort of behavior, which went on all the time during the dot-com bubble and led to investors feeling fleeced while handpicked insiders reaped the benefits. Morgan Stanley and other banks paid $1.4 billion in fines and pinky-swore to never ever do it again, in a pact known as the Global Research Analyst Settlement.

Turns out that pinky-swear had a short life span. And if every fine over future violations is going to be like today's, then we can bet that it will be violated again.

Morgan Stanley neither admitted nor denied wrongdoing in paying its $5 million fine. So why would it agree to pay $5 million, you might ask? Isn't that a lot of money?

It is, if you are not Morgan Stanley.

For one thing, the fine is just a fraction of the estimated $68 million Morgan Stanley made in fees on the IPO. Not to mention the untold millions the bank made on a feature of the deal that gave it an automatic bet against Facebook's stock price, which promptly collapsed.

And Morgan Stanley raked in $7.6 billion in revenue in the third quarter, or about $57,000 per minute, meaning it will take the bank all of 87 minutes to recoup its fine. That is the exact length, to the minute, of the third Alvin and the Chipmunks film, "Chipwrecked."

This is the latest in a long line of wrist slaps, some gentler than others, regularly doled out by financial regulators these days. The greatest example was the $1 million Goldman Sachs paid recently for failing to keep an eye on a "rogue" trader, a fine it could recover in 24 minutes, or one episode of SpongeBob.

Good on William Galvin for at least bringing Morgan Stanley's alleged shenanigans to light. But when bankers see fines like this, which are not even the cost of doing business for their banks, they have every incentive to keep pushing the regulatory envelope. Because that's where the real money is, just outside that envelope. If they get caught, the worst that will happen will be a tiny fine that their banks' shareholders will cover without even noticing.

Somewhat more stinging may be the big headline fines we've seen flying around lately in higher-profile money-laundering and Libor-manipulation investigations. HSBC recently agreed to pay $1.9 billion to settle money-laundering charges. And UBS is reportedly about to pay nearly that much to settle Libor charges, and will even plead guilty to a minor crime.

But UBS's plea will be entered in Japan, far from home, where it can do no harm. Possibly 36 bankers will be "implicated" in the UBS case, the Financial Times reports, but how many of them will actually be charged with crimes? Some will certainly be better than none, which was the case with HSBC -- neither the bank nor any of its executives were charged with any crimes, despite extensive evidence that crimes were committed.

And you'll notice that both of those large fines to be paid by HSBC and UBS could be covered even by the smaller Morgan Stanley with a half-quarter's revenue.

Whether it be lax fines or a lack of criminal prosecution, when these penalties lack real teeth, they all but guarantee that the law will be violated again and again.

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