On May 17th, Facebook had its long anticipated Initial Public Offering (IPO). It sold shares at $38 each, giving it a market valuation of $104 billion. For an instant, Facebook was the 23rd most valuable company in the U.S. The ensuing debacle serves as a metaphor for the U.S in general.
Facebook is an eight-year-old social networking service that has over 900 million users worldwide. It's a convenient way to maintain contact with family and friends -- for example, to post photos of your new relationship or grandchild or pet.
There's nothing wrong with Facebook selling stock in order to raise money and compensate its employees and investors. It's the dream of every entrepreneur to start a company that one day becomes successful, has an IPO, and makes its founders wealthy. It's the nature of the free market.
But in this case there was a serious problem with the valuation of Facebook stock. On May 17th, Bloomberg Financial Services reported that at $38 per share, Facebook would be "the largest company to go public in the U.S. by market capitalization... Facebook's valuation is worth the combined market capitalizations of News Corp., Time Warner Inc. and CBS Corp." At its offering price, Facebook was worth more than: Amazon, McDonald's, Cisco, Comcast, Visa, and Citigroup, among others. On May 17th Facebook ranked in the top 10 of technology companies; Facebook was worth roughly half of Google, the company it is most often compared to.
Then the bubble burst. As soon as Facebook shares (ticker symbol FB) were available to the public, the price began to drop. As of this writing, the stock price is $26.31 and the market value is $56.25 billion.
The Facebook Corporation, and those employees and investors who sold FB stock on May 17th, got a good deal at $38 per share. So did the IPO underwriters, who received a fat commission. But little investors -- those who were hoping that Facebook would quickly become another Google -- got burned.
The stock market and most Americans have been in a funk because of the lethargic U.S. economy, characterized by persistent high unemployment, and the financial crisis in Europe. Financial analysts had hoped that the Facebook IPO -- a highly visible, much-anticipated event -- would cheer up Americans and rekindle their interest in the stock market. Instead it contributed to the economic malaise and reconfirmed some of our worst fears about the financial community.
Why did the Facebook stock price fall? Writing for CNN Money, Julianne Pepitone had three explanations. First, on the morning of May 18th -- when Facebook opened public trading on NASDAQ -- there was an unprecedented trading glitch, "that left investors unsure about how many shares they bought or sold, and at what price." Second, on May 24th a lawsuit was filed, "alleging that important information about Facebook's financial outlook was 'selectively disclosed' to big banks ahead of the IPO." Reuters reported that four major Facebook IPO underwriters -- Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America -- "received privileged information about Facebook's financials -- information that wasn't shared with regular folks... the lawsuit alleges that Facebook told analysts at its underwriters "to materially lower their revenue forecasts for 2012." Finally, Pepitone noted that Facebook's IPO price, $38, gave it a valuation that many analysts felt was "remarkably high given Facebook's financial fundamentals."
Writing in the New York Times, Nathaniel Popper observed that the Facebook debacle reinforced American sentiment to get out of the stock market. "The portion of Americans invested in the stock market dropped this year to its lowest level since Gallup started asking, every two years, in 1998." Popper interviewed a Madera dairy farmer who said, "watching the Facebook offering had confirmed all the fears and suspicions that led him earlier this year to take out the savings, in the five figures, that he and his wife had invested in stocks and stock mutual funds and move the money into real estate investments. 'We've lost trust in the whole scenario.'"
Eight years ago Americans trusted the financial community. That was one of the factors that spurred George W. Bush's effort to privatize Social Security. Now that trust has evaporated.
The Facebook IPO reinforces the widespread perception that the people who run Wall Street can't be trusted. In October a CNN/ORC Poll asked, "Overall, how much do you trust Wall Street bankers and brokers to do what is best for the economy: a great deal, somewhat, a little, or not at all?" Fifty-four percent responded, "not at all." Polls like this, and Occupy Wall Street, indicate that most Americans feel that the nation's financial system has been tilted in favor of the rich and powerful.
There will be many possible themes for the 2012 Presidential election -- jobs, women's rights, and religious tolerance, among others. But a central theme should be "who do you trust to clean up Wall Street?" President Obama has enacted modest reforms to police Wall Street. Mitt Romney wants to repeal them.
The Facebook debacle indicates that there is more work to be done before Americans can return to the stock market and trust that the financial community operates in the best interests of all the people, not just the one percent.
It is not you and it is not me.
The Supreme Court has drowned your voice and mine in the miasma of corporate money chasing access and power. Republicans have been clear that they will sacrifice the country (you and me), refuse to govern, and hold up empty social issues as a paean to their purity...all as a ploy to take power.
So, watch the money, though the Supreme Court has struck down your right to know whose it is. Watch the ebb and flow of power as it moves to ideology and not to practice. Watch as the shift continues to position the wealthy for the world stage and positions you and I as wage and debt slavery, with pretty toys and poor education (also no longer the right of every American)...we are their food. Lest I paint too broadly, always see those among us who care, and are human. There are many. Do not do them in.
The trends are not stoppable as we confuse power, as we treat social issues as war, and as we ignore the plight of the common man, and the sick, and the poor.
Maybe the better question should be who CAN we trust?
Who do I trust?
Nobody.
Not Wall Street.
Not Washington.
Trust has to be earned,
Neither of them has done anything to earn my trust.
IMPO...........Anyone who doesn't think that Wall Street is rigged for the big investors, hasn't been paying attention.
Government? The ones we elected to look out for us?
http://insidertrading.procon.org/view.answers.php?questionID=001034
When people realize the game is crooked. Smart ones stop playing.
If retail investors leave en masse, and don't return.
The sharks will have to feed on each other.
Personally........................I'm looking forward to that.
Can you say "Pump and Dump" boys 'n girls?
Still, I have a buy order in for whenever it falls to $4.00 a share.
We must have a level playing field or the markets will not be functional for any but the most powerful with access to real information. My observation that the markets are, to some extent a contrivance, is born out by this
I can understand brokerage companies playing with second-to-second transactions because they have the software. How much of this volatility is individual investors trying to ride the coat tails of big brokerages? A lot? A little? Not at all?
This is simply not a worthy goal. An economy which employs people is.
because fb is vapor, it's where I go to share stories about how f'ed capitalism, gov't and fb is.
At the moment, it appears that the key issues in this election are going to be the related issues of jobs and the economy. Unfortunately, unless the economy starts growing significantly or unless Obama starts blaming the Republicans in Congress, and not just "Congress" in general, for lack of growth, I think those key issues are likely to prevent Obama from getting reelected.