Thursday, May 31, 2012

Facebook IPO

Facebook, the extremely popular social networking site, went public recently and made big news.  Its IPO (initial public offering) price was $38.  On the first day of trading, the stock went up above $40, but then retreated back before the day was over.  Since then, the stock has taken a big hit, losing about $10 per share, which is well over 25%.

Investors are suing Morgan Stanley, Goldman Sachs, and JP Morgan, alleging they were misled in their purchase of the stock.  This is because the banks didn't reveal lower revenue estimates before the shares started selling.

As a libertarian, I don't have much sympathy for the big banks.  They are mostly in cahoots with the federal government.  They get protection from the FDIC and the Federal Reserve.  They get to take big risks and make a lot of money, but then when the tides turn, they will get bailed out.  The big banks in America are not free enterprise institutions.  They rely on cronyism.

With that said, I think these lawsuits are bogus.  It just shows that people will sue over anything.  The reason I am not that sympathetic to investors is because they are acting just like the banks they are suing.  They think they should get all of the upside of a winning stock.  But then when it doesn't pan out, then they are all of a sudden suing and using the force of government to intervene.  They don't want to take responsibility for their actions.

When I heard that Facebook's initial public offering would value the company at about $100 billion, I knew to stay away.  I am not one of those people who is negative on Facebook.  A lot of people think the company is a joke and can't understand how a website that doesn't really sell anything can be of any value.  These people are wrong.  Facebook will probably have a billion users soon.  Take the entire population of the United States and triple it, and that is the approximate number of Facebook users.  With that volume, the company makes money and is going to continue to make some money, even if it is just from Google ads.

However, I think a $100 billion or more valuation seems quite high.  I could have been wrong.  The stock could have gone up quickly, particularly with people wanting to get in on the action.  But I thought it was a huge risk and I stayed away.  Nobody forced me to invest in it.  Nobody threatened me to buy some shares.  I can continue to use Facebook and pay nothing and not own a single share.

These investors who are suing knew the risk they were taking.  Any time you buy shares in a single company, you are taking a significant amount of risk.  But now that the investors are losing money on what was supposed to be a winning stock (at least to them), they are blaming others and using the courts to try to settle the score.  While I'm not exactly cheering for the big banks, I hope the investors lose in this battle.

As far as the banks, the market should be allowed to work.  Unfortunately, we don't live in a free market world right now.  The big bankers are part of the establishment.  In a free market environment, the market would determine if these banks did anything wrong in not disclosing revenue estimates.  Customers and investors would not continue to do business with these firms in a free market environment, if they thought the banks were doing something wrong.  This is a situation where the markets should decide and not the courts.

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