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Daniel Dicker

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Facebook IPO -- How Wall Street Lost the Retail Investor, Again

Posted: 05/28/2012 2:16 pm

Wall Street blew it again. They had this one grand chance in the Facebook IPO to try to restore some of the investor confidence that has been lost in the last four years of bank bailouts and bonuses -- and they blew it.

Wall Street brings many new companies to the investing public every year -- but Facebook is no ordinary company. With 900 million users, Facebook is the application of the masses, used to connect the 99 percent and organize the protesters for "Occupy Wall Street", the Chinese dissident community and the Arab Spring. This was a company that everyone thought they understood, and the prospect of getting in on the ground floor, of owning a piece of the next Apple or Amazon or Google, excited the interest of the retail investor in a way that few other stocks will ever have the opportunity to do.

And Wall Street needed to respect that opportunity. The gains that have been achieved in the stock market since 2008 have largely been without the participation of the retail investor -- that middle-class worker who used to save an extra $20 or $100 or $500 a week to invest in stocks. But that crucial customer to Wall Street has gone unrewarded in the last ten years -- the so-called "lost decade" -- as stock indexes have gone nowhere, while corrupt bank executives and institutional investors have managed to protect their wealth and prosper through the backstop of the United States Treasury.

And retail investors have not surprisingly abandoned the stock market, moving their money into savings accounts and bond funds and annuities. They have had all their suspicions confirmed in the last four years that the stock market is a "rigged" game and have largely refused to play anymore -- even though they must engage in stocks at some point again in order to finance their kids' educations and their own retirements.

Into this backdrop comes the Facebook IPO -- this chance to deliver to the retail investor a new beginning of investing confidence. All Wall Street needed to do was deliver a fair price -- an honest price -- to the common, middle-class investor in this social network application of the masses.

Instead, what they delivered was a shafting of the retail investor to the benefit of their best customers; the venture capitalists, prime brokers and inside institutions. They did it through secret information shared only among the insiders. They did it by increasing the offering price to $38 from an initial target of $28 to $31. They did it by increasing the number of shares by 25 percent only days before the offering and increasing it yet again by opting to use a 63 million share "greenshoe". The financial media shared the blame by hyping the offering to the sky. The NASDAQ added to the disaster by postponing the initial time of the start of trading to allow institutional orders to be 'restaged' while retail orders remained in place and by not delivering prices on executed trades to retail customers, sometimes for days after the initial start of trading.

The upshot of this is hundreds of millions of dollars lost by the retail investor, as the initial price of $38 was breached on the second day of trading and has since plummeted 18 percent in a week.

The irony of this is sad but also perfect -- here we have the company of the proletariat coming to Wall Street, and instead of helping to restore their reputation, reinforced the investing public's suspicions of who Wall Street is really working to help.

What a shame. The retail investor will again go back to his bonds and his savings accounts, even though a stuffed mattress will never allow a hard middle class investor to put his kids through school and maybe retire with a bit of financial comfort. He needs the stock market as much as Wall Street needs him.

And there was an opportunity to begin to repair that tarnished and trammeled relationship last week in the Facebook IPO. But Wall Street blew it.

 
 
 

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