Facebook loses face as share prices plunge $42 Billion in 10 days

by Selvam Canagaratna

“On Wall Street, he and a few others – how many? – three hundred, four hundred, five hundred? – had become precisely that . . . Masters of the Universe. There was . . . no limit whatsoever!” – Tom Wolfe, The Bonfire of the Vanities (1987)

In the midst of an unprecedentedly precipitous share-price plunge wiping out social networking giant Facebook’s value by over $42 billion in just ten days, the Wall Street Journal, which inevitably mirrors its owner Rupert Murdoch’s unbridled corporate greed, caught the crummy essence of the street it’s named after when, on the third day of the IPO (May 21) it observed matter-of-factly:

“Investors that shoot for IPO allocations needn’t worry that a high stock price overvalues the company if they are confident they can find a ‘greater fool’ willing to pay more.”

The WSJ was indeed telling it like it is, warts and all. As it turned out, there certainly was no shortage either of ‘greater fools’ or their abundant moolah.

By the end of May the share-value of Facebook stood at $61.98 billion, a sharp fall from the $104 billion it was valued at when the company went public on 18 May. And future projections were anything but rosy.

At the time of writing, Facebook’s share had dropped below $30. In short, the much-ballyhooed IPO turned out to be an absolute disaster for an army of fools given to chasing rainbows.

Walter Zimmermann, Chief Technical Analyst at United-ICAP, an advisory service, said the share sale had represented “a mania of historic proportions”. He noted that discussions of technical issues missed a wider point. Facebook had sold so many shares – 96 million – that there was little appetite from investors who had not bought shares. “Who’s left to buy?” he asked.

Three of Wall Street’s biggest and best-known financial institutions handled the Facebook IPO; so why were potential investors immediately suspicious when the stock soared and then promptly tanked? asked one writer on the web. “Easy answer: Because three of Wall Street biggest and best-known financial institutions handled the Facebook IPO. Each of them – Morgan Stanley, Goldman Sachs, and JPMorgan Chase – has a history of exactly the kinds of unethical and/or illegal behaviour that might, just might, explain what happened with Facebook. This was an IPO that was going to save California and uplift the western world. It was so overhyped and overvalued that it could only fall,” he explained.

Mark Gongloff of the Huffington Post noted that the Facebook IPO had examples of pretty much everything that was wrong with the stock market today. “Media and analyst cheerleading? Check. The destructive influence of high-speed trading? Check. A system built for insiders to profit while retail investors pick up scraps? Duh.”

On the very first day, May 18, there were problems with NASDAQ’s handling of the IPO. The exchange was swamped by a flood of orders, including a flurry of canceled orders, from high-frequency trading robots, the Financial Times. reported. The technical hangups delayed the start of trading by about half an hour and left many traders in the dark about whether their orders to buy shares had been accepted.

As a direct consequence, frightened and confused investors stepped back, wrote Gongloff, forcing underwriter Morgan Stanley to enter the market and keep Facebook stock afloat at $38. “Since then, Morgan Stanley has apparently either given up supporting the stock or has run out of the dry powder to save it.”

But high-frequency traders, he noted, were still going strong. More than 570 million Facebook shares changed hands on its first day of trading, followed by more than 160 million on its second, “and it’s on pace for another 100 million-share day.”

That was abnormally high trading volume under anybody’s definition, in Gongloff’s view. “It suggests that high-frequency traders are using the stock for a plaything – and will keep doing so for a while to come, particularly with more shares hitting the market as IPO lockups expire in the months ahead. When a stock is this volatile, it’s very profitable for a short-term trader to zip in and out of it.”

The chickens have come home to roost early. . . Massachusetts has served Morgan Stanley with a subpoena looking for info about its communications with institutional investors ahead of the IPO. Securities and Exchange Commission chief Mary Schapiro, told reporters that regulators should look into issues surrounding Facebook’s IPO, but inexplicably added: “Investors should stay confident in US financial markets. I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate”, prompting Gongloff’s exasperated response: “It sure is hard to see what she’s talking about.”

The most perceptive comment on the disaster came from Lynn Parramore, a contributing editor on the AlterNet website. She is also co-founder of Recessionwire and founding editor of New Deal 2.0.

Wrote Parramore: “Zuckerberg demonstrated his appreciation of the finer points of greed with a surprise wedding – right after the IPO – to his girlfriend of 10 years, Priscilla Chan. We are told the timing was a mere coincidence. Nobody is really buying that one, either. California is a community property state, meaning that everything earned during the marriage belongs to both partners by law, but everything earned before the wedding is kept by the individuals. So if the pair ever decide to divorce, Chan will not be walking away with a penny of Mark’s pre-wedding billions.”

In the wake of the JP Morgan blow-up and the Facebook debacle, she noted, Americans were contemplating the stock market with a mixture of alarm and disgust. “Both are justified. In the world of high-speed trading and manipulation, the ordinary investor who wants to make money over the long haul can easily get screwed by those playing a short-term game.”

As Parramore tells it, many of the people who lost money are experienced folks looking to make a short-term profit when, they hope, the price of the stock goes up immediately after the IPO, partly due to the frenzy. Others are just ordinary people who asked their brokers to get them in on the game when they read about all the excitement in the paper. Unfortunately at this point, everybody except that privileged inner circle is feeling a bit like the poor souls at the blackjack table – angry that their money has been lost in a game they were never meant to win. In essence, the entire IPO show is little more than an ‘organized gambling event’ where insiders with the privileged information are usually the ones who come out ahead.

“Facebook is all about sharing. And rainbows! And unicorns! Actually, it looks as if Zuckerberg and the megabanks that managed the deal decided to share pertinent information about the value of the stock to their . . . friends. That select group of one-percenters did not include the public. The Orwellian term bankers like to use for this kind of deception is ‘selective disclosure’,” said Parramore. “Shareholders have begun filing lawsuits against Facebook and Morgan Stanley over reports that they deliberately held back negative analyst reports before the company went public. US regulators have launched an investigation to determine whether or not securities laws have been violated. Why does this happen? Well, mostly because the public is playing a rigged insider game known as the stock market.”

One must conclude, sadly, that there’s much method in this madness.

God seems to make more fools than knaves. [How else can the one-pecenters survive and prosper?]