Nel's New Day

May 24, 2012

Investors Upset about Facebook IPOs

Almost everyone I know seems to belong to Facebook; worldwide the number of members is up to 900 million. I belong only because I had to join in order for a conference get-together four years ago and I can’t get off after losing my password. Occasionally the desire from someone to “friend me” wanders into my email, and I just delete it with the resolution to get rid of my Facebook relationship.

There’s also been lots of discussion within the past year about whether teachers and students can be “friends” and whether employers can demand applicants and employees’ restricted Facebook passwords. Some schools are even asking students for their passwords. (They can look at my Facebook page if they’ll only take me off!)

Last week, however, media attention surrounding Facebook ratcheted up after the company decided to go public. As many people know, it began with the company belonging to the 28-year-old CEO Mark Zuckerberg providing something called “initial public offering” (IPO) and continued with the brouhaha surrounding the Brazilian co-founder Eduardo Saverin giving up his U.S. citizenship to take his $67 million—tax free—to Singapore where he maintains residency. Singapore doesn’t tax capital gains.

Initially Facebook stock soared from $38 per share to $45, before shooting down to $31, losing $2.9 billion for investors. Meanwhile, Zuckerberg walked off with over $1 billion dollars in his pocket before he got married last weekend.

The investment loss resulted in lots of finger-pointing. Facebook’s CFO David Ebersman decided to increase the number of shares offered to investors by 25 percent just days before the IPO. NASDAQ’s computer systems failed on the morning of the deal; investors couldn’t place orders or cancel orders or find out if their orders had been placed or canceled. A modest stock “pop” probably caused some institutional investors to immediately dump their shares, causing a greater price decline.

The biggest problem, however, may be that estimates developed by the underwriters to determine a fair price were cut partway through the debacle. Facebook told the underwriters, but not the investors, that its business outlook had deteriorated. Institutional investors were okay; individual investors weren’t.

Investors are not happy about the loss, but they’re really not happy about finding out that underwriter Morgan Stanley had cut revenue forecasts before the offering, an action that investors didn’t know until after the stock was listed. Underwriters JPMorgan Chase (of the famous multibillion-dollar losses this spring) and Gold Sachs also “selectively” changed their estimates early on, letting special clients know earlier than the others.

Yesterday, riled investors filed a proposed class-action suit in federal court against not only Zuckerberg but also Morgan Stanley, JPMorgan, Goldman Sachs, and other underwriters of the IPO, arguing that they were not informed of the trim in revenue expectations. The state of Massachusetts issued a subpoena to Morgan Stanley for documents related to the IPO. Investors also sued the Nasdaq OMX Group because the exchange struggled to process orders during the first half hour of trading.

SEC is trying to figure out what to do: Chairwoman Mary Schapiro said that regulators are “looking into” the “issues.” Congressional lawmakers have raised questions about the deal. Chairs of both the Senate Banking and the House Financial Services committees are getting information about what happened  to see if they should have hearings.

Morgan Stanley has a history and a culture of tricking their own clients into making lousy investments. CNBC reports, “Morgan Stanley may have spent billions of dollars to support the [Facebook] stock price by buying shares in the market.”

Before losing up to $4 billion—so far—in its botched derivatives scam, JPMorgan Chase gave up billions more to settle charges stemming from its rampant foreclosure fraud, which involves mass perjury and forgery, and its bribing of public officials.

Goldman Sachs lied to prospective investors about mortgage-backed securities and illegally shared confidential information with its preferred clients.

Conservatives like to talk about the virtues of a “free market,” but the lack of regulations gives the entire game to the financial corporations. Investors can’t know until it’s too late what the banks are doing to take all their money. In summary, the Facebook IPO demonstrates how shady traders make money by hyping stock while secretly betting against it.

These huge financial corporations can break any law that they want. When they get caught, they just pay a fine that they can afford because they have stolen so much money that it isn’t a problem for them. Maybe losing money will teach Republican investors that their party doesn’t benefit them as individuals.

May 12, 2012

JPMorgan Chase Shows Need for Regulation

Filed under: Uncategorized — trp2011 @ 10:06 PM
Tags: , , , ,

The news surrounding JPMorgan Chase’s loss of $2 billion shows that it came from unregulated gambling, pure and simple. Last summer the bank sold insurance on corporations such as General Mills, Alcoa, and McDonalds. If the companies went bankrupt, JPMorgan had to pay, but if they did well, then JPMorgan got fees from financial firms that bought the insurance. The transactions were so successful that they drove down the price of insurance, and hedge funds started to bet against JPMorgan. Technically, JPMorgan could coast on the losses until 2017, but with the public knowledge of what they are doing, hedge funds could force the cost of this specific insurance contract up, and with it JPMorgan’s paper losses. That’s why the company has lost $2 billion since March.

In an editorial for the New York Times, Joe Nocera asks, “When Will They Learn?”

Jamie Dimon, the chief executive of JPMorgan Chase, can be clear as a bell when he denounces financial reform. But on an emergency conference call with analysts on Thursday to announce the bank’s stunning $2 billion trading loss, his message was frustratingly vague.

The loss, according to Mr. Dimon, was in the bank’s “synthetic credit portfolio,” which presumably means it involved the same type of complex derivatives that played such a destructive role in the financial crisis. And Mr. Dimon said that sloppiness, bad judgment and stupidity–his own and his colleagues’–had led to the loss.

It was a stunning admission from a man who led JPMorgan through the crisis relatively unscathed, but it doesn’t explain what actually went wrong.

What Mr. Dimon did not say is that the loss also occurred because of a continued lack, nearly four years after the crisis, of rules and regulators up to the task of protecting taxpayers and the economy from the excesses of too big to fail banks; and, yes, of protecting the banks from their executives’ and traders’ destructive risk-taking.

The fact that JPMorgan’s loss–which Mr. Dimon has warned could “easily get worse”–is not enough to topple the bank, is not the point. What matters is that JPMorgan, like the nation’s other big banks, is still engaged in activities that can provoke catastrophic losses. If policy makers do not strengthen reform, then luck is the only thing preventing another meltdown.

Bank regulators should start by adopting a forceful Volcker Rule. Proposed by Paul Volcker, the former Federal Reserve chairman and included in the Dodd-Frank reform law, the rule would curtail risky and speculative trading with the banks’ own capital.

Banks hate the Volcker Rule, because less gambling means lower profits and lower bonuses for executives and traders. Mr. Dimon has been especially contemptuous, saying at one point that “Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me.” Early versions of the restrictions have been ambiguous and toothless.

Dodd-Frank also calls for new rules on derivatives–including transparent trading and requirements for banks to back their trades with collateral and capital. If such rules were in place, JPMorgan’s trades could not have escaped notice by regulators and market participants. In the face of heavy lobbying, the derivatives’ rules have also been delayed or watered down.

There are now several bills in the House, with bipartisan support, to weaken the Dodd-Frank law on derivatives. One of those would let the banks avoid Dodd-Frank regulation by conducting derivatives deals through foreign subsidiaries. The JPMorgan loss was incurred in its London office, which doesn’t lessen the effect here.

Mitt Romney has called for repealing Dodd-Frank. That may win him Wall Street cash, but it is profoundly dangerous. President Obama and Congressional Democrats can take credit for Dodd-Frank, but they have not done enough to ensure that the rules are strong enough.

The force of Mr. Dimon’s critique of Dodd-Frank has rested on his personal reputation for smarts and on JPMorgan’s sheen of invincibility. His own admitted fallibility and the bank’s shocking stumble are the best argument in favor of strong regulation. Now politicians and regulators need to stand up to the banks.

After getting bailed out a few years ago, JPMorgan made almost $19 billion last year; people might think that the company can afford to lose more than $2 billion. This danger to the country’s economy, however, should renew the debate over whether banks make big bets under the guise of hedging. An old market adage says the best way to hedge is to simply sell an asset, rather than offset it with potentially dangerous derivatives, diving too deeply into credit. The Volcker Rule attempts to distinguish between true hedging and trading.

The losses also raise questions about JPMorgan’s ability to manage its risks. When it reported first-quarter earnings in April, it released a metric of risk-taking in the chief investment office that made it look as if the unit was taking risks in line with other parts of the bank. But last week, the bank released a new measure of risk-taking that was nearly twice as high.

“JPMorgan Chase C.E.O. Jamie Dimon has been a relentless critic of financial reform,” said Dennis Kelleher, president of Better Markets, which supports tougher regulation of banks. The surprise loss, he said, “proves him wrong.”

JPMorgan was lucky last week because the news concentrated on President Obama’s announcement that he approves of marriage equality. But the company may not be as lucky with the fallout for their debacle.

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