The essence of what really went wrong was that Morgan Stanley favored the sellers more than it should. Why that was, we don't know. Was it because at the last minute things had gotten so bad at Facebook that it just had to put on a big show and tell only some how bad things really were, but rely on moronic over-the-transom retail to keep the deal in the high $30s?
Was it because the Facebook execs demanded this pricing? Was it because the syndicate desk actually thought it had demand at these prices even as many retail execs indicate that they were overwhelmed at the last minute with stock? I find it hard to believe that syndicate didn't know how bad the deal would fare, given that some branches were given allocations well in excess of what demand was, a sure sign that syndicate knew things had gotten out of hand.
Remember how the process works. In a putative hot deal you should only get a fraction of what you put in for. If you put in for 10,000 shares you are hopeful to get 1,000. If you get 2,500, that's a huge win. But if you get 5,000 you begin to get nervous because it means there may not be as much oversubscription -- meaning demand -- as you thought. If you put in for 10,000 and you got 10,000, you know you're sunk.
But in this deal, I know brokers who got well in excess of their 10,000, to the tune of a factor of twice or even three times what was requested, with the idea that somehow you could give your clients a real break by getting in.Allocations like that show pure greed, typically on the part of the issuer, because Morgan Stanley makes the same amount of money either way. But it also could be because Morgan Stanley totally botched the deal as it knew that the fundamentals had gotten much worse than they thought, and they winked and nodded to their biggest clients in a legal but horribly unfair way. Either way, greed on the part of the issuer or failure to gauge real demand on top of faltering fundamentals by Morgan Stanley, the individual investor was the huge loser. And he has stayed the biggest loser. Maybe the 13-year-old-and-under crowd will help ameliorate the downturn in the fundamentals that the deal is certainly signaling. But it is a little too late to help the individual who was the mainstay of our deep markets. Just a shameful exercise all the way around, including the admonishing of the buyers who believed that the bankers had it right when they most certainly had it wrong.
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