NEW YORK (TheStreet) -- The Facebook IPO is an excellent reminder of the role that amnesia plays in the stock market.
It's said that markets are efficient, and I guess they are in a narrow sense, in that stocks tend to incorporate all of the publicly available information about them. But the same principle certainly doesn't apply to the way market participants interact with one another. So we have the spectacle of
repeating the mistakes of 2008 and losing $3 billion (and counting). For the rest of us, we have the Facebook IPO, in which an entire body of knowledge and memory of the IPO process was buried down the memory hole, totally forgotten.
How did a company best known for wasting people's time (when it's not violating their privacy) become the IPO stinker of our times? Because people forget that it's been proven time and again that the only proven winners in IPOs are the issuers, insiders and underwriters, with favored clients like hedge funds and institutional investors the only ones able to benefit consistently from IPOs that perform well out of the starting gate.
In this case, the issuer made out like a bandit. Facebook reaped $16 billion that will allow it to compete with the Goliaths of the industry. Facebook management, meanwhile, has borrowed from the techniques of shoddy used-car salesmen everywhere by failing to give full value for all that money.
As has been pointed out with increasing alarm by several commentators, most recently
, Facebook CEO Mark Zuckerberg structured the deal so that he isn't even giving up control of the company. So in a larger sense, divorced from the aftermarket performance and the other controversies swirling around the IPO, the Facebook IPO already stank to high heaven before the first share traded. It was a kind of IPO Lite, offering shareholders the trappings of ownership of the company without giving them the full privileges of ownership.
And who are those lucky investors who bought into the IPO Lite? The word that comes to mind is "ignorant," and I mean that in a nice way.
Unless they were totally brain dead, the people buying into the IPO were not among the handful of favored investors who were
about the company's
lackluster financial results
. The clued-in "smart money" stayed away from the offering, while the rest of us ignorant, uninformed suckers were able to load up on the shares.
The result was the living embodiment of Will Rogers' advice on how to make money in the stock market: "Buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." Facebook shares weren't going to go up, so the usual favored investors didn't buy it, thanks to the tipoff that they got from their underwriters, who were tipped off from within the company.
But you didn't have to be among the favored few to know that the history of IPO investing is replete with sleaziness. Thanks to the Internet, any of what
charmingly referred to as "Muppets" can access the sordid history of IPO investing with just a few mouse clicks.
It's forgotten that in the aftermath of the 1998-2000 tech boom, it emerged that investment banks systematically rigged the price of IPOs to benefit themselves and their largest customers. In 2003, 300 companies and all of the major investment banks
civil cases arising from their use of techniques like "laddering" to manipulate share prices. In laddering, clients who got shares in IPOs were obliged to support the stock afterwards by making more shares in the aftermarket. Doing so ultimately lured in small investors, who were ultimately creamed when the shares went bust.
At about the same time
, the 10 largest investment banks paid $1.4 billion in the "global settlement" that was reached with the Securities and Exchange Commission and state regulators, including Eliot Spitzer. Among the allegations was that executives of companies received cut-rate shares in IPOs in return for giving banks their business. Among the high-tech execs who fed from the IPO trough was
When the issue reared its head in her unsuccessful race for governor of California a couple of years ago,
that she wasn't being bribed by Goldman Sachs -- Whitman's "spinner" -- because she was simply getting the kind of nice treatment that Goldman bestows on its richest clients.
The "spinning" scam was, in turn, nothing more than a replay of the kind of chicanery that penny-stock brokerages used to pull in the 1990s, when cheap stock was routinely doled out to insiders and IPOs were brazenly manipulated by underwriters.
This kind of thing has been going on for years, yet small investors continued to be drawn to IPOs and continue to be creamed. Why?
A lot of it is hype in the financial press. But I wonder if it might not simply be greed, but the mythology that has built up around IPOs as creatures of the vaunted "capital-raising mechanism" that is supposed to be the heart and soul of the U.S. markets, if you listen to politicians as they run for president and argue for deregulation.
Well, we're seeing that "capital raising function" on display, right now, in the Facebook IPO. How do you like it? Working smoothly? Behaving fairly? Treating all market participants equally?
Opponents of regulation say we risk losing IPOs to overseas bourses because of Sarbanes-Oxley, Dodd-Frank and other regulatory schemes. Well, if the Facebook IPO is an example of all the benefits that IPOs have to offer, I'd say Europe is welcome to have them.
Gary Weiss's most recent book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press.
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