Posts Tagged Goldman Sachs
5 Ways America Is Being Hollowed Out by Unfettered Corporate Greed
There’s no free market — just businesses doing whatever they please with virtually zero accountability.
Conservatives believe that enriching individuals will eventually enrich society, and that government should not get in the way of the process. This is what happens as a result:
(1) The tax loss from one scheming businessman could have paid the salaries of 30,000 nurses
The lack of regulation in the financial industry allowed hedge fund manager John Paulson to conspire with Goldman Sachs in a plan to create packages of risky subprime mortgages and then short-sell (bet against) the sure-to-fail financial instruments. The ploy paid him $3.7 billion. Deregulation in the tax code allowed him to call his income “carried interest,” which is taxed at a 15% rate. More deregulation allowed him to defer his profits indefinitely.
The lost taxes of $1.3 billion (35% of $3.7 billion) could have paid the salaries of30,000 LPNs, 10 nurses for every county in the United States. Instead, one clever businessman took it all.
(2) The 10 richest Americans made enough money last year to feed every hungry person on earth for a year
The richest 10 Americans increased their wealth by over $50 billion in one year. That’s enough, according to 2008 estimates by the Food and Agriculture Organization and the UN’s World Food Program, to feed the 870 million people in the world who are lacking sufficient food.
But should anyone be blamed for this imbalance? Didn’t the rich people EARN their money through hard work and innovation? No, they didn’t. 60 percent of the income for the Forbes 400 came from capital gains. A lot more of it came from other forms of deregulatory subterfuge. CEOs have used carried interest,performance-related pay, stock options, and deferred compensation to make off with extra money that is only available to the beneficiaries of diminishing government.
(3) Avoided taxes could pay off the deficit — or pay for 20 million jobs
The backlash against government regulation has led to tax abuses that cost us almost a trillion dollars a year.
Corporations doubled their profits to $1.9 trillion in less than ten years, but since 2008 they’ve reduced their tax payments from a twenty-year average of 22% to just 10%. That’s a dropoff of over $225 billion.
Next, the Tax Justice Network estimated that up to $32 trillion is hidden offshore, untaxed. With Americans making up 40% of the world’s Ultra High Net Worth Individuals, and with a historical stock market return of 6%, $750 billion of income is lost to the U.S. every year, resulting in a tax loss of about $260 billion.
Finally, the IRS estimates that 17 percent of taxes owed were not paid, leaving an underpayment of $450 billion.
Add it up, and it’s almost the size of the U.S. deficit. All because of lax or non-existing regulations that allow wealthy individuals and corporations to avoid their tax responsibilities.
(4) An unregulated trading industry costs us another $350 billion a year in taxes
For a $10.00 purchase of children’s clothing, mothers pay up to a dollar in sales tax.
For a $10.00 purchase of financial instruments, investors refuse to pay one cent.
We had a financial transaction tax from 1914 to 1966, but it was repealed in an early surge of Congressional deregulation. Now, it is estimated that $350 billion could be generated every year, enough for almost ten million teachers or nurses or firefighters or medical technicians.
(5) Redistribution is destroying entrepreneurship in America
Largely because of financial deregulation, our country’s income and wealth keep moving to the top while the middle class shrinks. Entrepreneurship is going down with it.
Studies reveal that relatively few business startups are initiated by the very wealthy. Only 3 percent of the CEOs, upper management, and financial professionals were entrepreneurs in 2005, even though they made up about 60 percent of the richest .1% of Americans. Instead, they invest over 90% of their assets in a combination of low-risk investments (bonds and cash), the stock market, and real estate.
Entrepreneurs come from risk-takers in the middle class. But with financial deregulation causing a redistribution toward the top, the money has been taken out of the hands of middle-class innovators, resulting in a 53% decrease in the number of entrepreneurs per capita since 1977.
We’re at the mercy of the deregulators. But they have no mercy. The once-muscular entrepreneurial fiber of our country is being ripped apart, stretched to the limit, thinning in the middle until it eventually snaps in two.
- Forbes 400 List Reveals Why the Greedy Rich Fully Deserve Your Contempt – And Jesus’s | Alternet (mbcalyn.com)
- Romney’s “Charity” to the Church is Just More Corporate Greed and Tax Evasion | Alternet (mbcalyn.com)
- 4 Easy Ways We Can Tax the Rich to Fill Government Coffers | Alternet (mbcalyn.com)
- Romney Says Typical Middle-Class Homes Earn $250,000 A Year | Alternet (mbcalyn.com)
- Revealed: Romney’s Bain Capital Invested in Grotesque Chinese Sweatshop, Detailed at Boca Raton Fundraiser | Alternet (mbcalyn.com)
- 7 Mitt Romney Statements As Idiotic as His Libya Response | Alternet (mbcalyn.com)
- 7 Best Jokes About Romney’s Threat to Off Big Bird | Alternet (mbcalyn.com)
- The Romney Men: 6 Filthy Rich Moguls Who Will Do Anything to Elect Mitt (alternet.org)
- 5 Ways Mitt Romney Would Double Down on U.S. Empire and Hegemony | Alternet (seculardiscourse.wordpress.com)
- 10 Conservatives Who Have Praised American Slavery | Alternet (mbcalyn.com)
Sad But True: Corporate Crime Does Pay
Almost daily we read about another apparently stiff financial penalty meted out for corporate malfeasance. This year corporations are on track to pay as much as $8 billion to resolve charges of defrauding the government, a record sum, according to the Department of Justice. Last year big business paid the SEC $2.8 billion to settle disputes.
Sounds like an awful lot of money. And it is, for you and me. But is it a lot of money for corporate lawbreakers? The best way to determine that is to see whether the penalties have deterred them from further wrongdoing.
The empirical evidence argues they don’t. A 2011 New York Times analysis of enforcement actions during the last 15 years found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach. Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America, among others, have settled fraud cases by stipulating they would never again violate an antifraud law, only to do so again and again and again. Bank of America’s securities unit has agreed four times since 2005 not to violate a major antifraud statute, and another four times not to violate a separate law. Merrill Lynch, which Bank of America acquired in 2008, has separately agreed not to violate the same two statutes seven times since 1999.
Outside the financial sector the story is similar. Erika Kelton at Forbes reportsthat Pfizer paid $152 million in 2008; $49 million a few months later; a record-setting $2.3 billion in 2009 and $14.5 million last year. Each time it legally promised to adhere to federal law in the future. Each time it broke that promise.
The SEC could bring contempt of court charges against serial offenders, but it doesn’t. Earlier this year the SEC revealed it has not brought any contempt charges against large financial firms in the last 10 years. Adding insult to insult the SEC doesn’t even publicly refer to previous cases when filing new charges.
We know that CEOs of big corporations never go to jail. We probably didn’t know they often benefit financially even when the corporations under their control violate the law. GlaxoSmithKline CEO Andrew Witty recently received a significant pay boost to roughly $16.5 million just four months after Glaxo announced it will pay $3 billion to settle federal allegations of illegal marketing of many of its prescription drugs. Johnson & Johnson Chairman and CEO William Weldon received a 55 percent increase in his annual performance bonus for 2011 and a pay raise despite a settlement J&J is negotiating with the Justice Department that could run as high as $1.8 billion.
What level of penalty might deter corporate crime? The Economist magazine recently addressed that question. It used the common sense framework proposed by University of Chicago economist Gary Becker in an influential 1968 essay. Becker proposed that criminals weigh the expected costs and benefits of breaking the law. The expected cost of lawless behavior is the product of two things: the chance of being caught and the severity of the punishment if caught.
Purdue Economics Professors John M. Connor and C. Gustav Helmers examinedthe market impact of over 280 private international cartels from 1990 to 2005 and the fines imposed on them by various governments. They estimated these criminal conspiracies in restraint of trade raised prices by $260-550 billion. The median overcharge was about 25 percent of affected commerce.
Thus a fine about 25 percent of revenue would repay the damage done. But that’s assuming wrongdoing is caught every time. The Economist suggests that catching one in three violations would constitute a good track record for regulators. That would mean a fine of 75 percent of revenue would be needed to deter future violations. But the study found that actual fines ranged only between 1.4 percent and 4.9 percent.
Last year’s SEC settlement regarding Citigroup’s fraudulent mortgage investment practices fits that pattern. The settlement was for $285 million, less than 4 percent of Citigroup’s $76 billion in revenues.
Often federal penalties are so low they might be viewed as an invitation to break the law. According to the Times, Citigroup had cheated investors out of more than $700 million, more than twice what it paid in penalties.
As for Glaxo’s $3 billion settlement, George Lundberg, for 17-years Editor-in-Chief of the Journal of the American Medical Association writes, “The penalty sounds like a lot of money but that company made probably 10 times that much from its illegal actions.”
What can be done? A first step might be for the media to stop reporting simply the gross settlement figure and instead give us the information that allows us to decide whether the punishment fits the crime. A few days ago a brief story in theNew York Times business section admirably achieved this goal.
The Times reported that in 2006 Morgan Stanley entered into a complex swap agreement with the New York electricity provider KeySpan that gave it a stake in the profits of a competitor. This enabled the two companies to push up the price of electricity. Morgan Stanley broke the law. On August 7 a federal judge approved the settlement between the Justice Department and Morgan Stanley.
Here’s the cost benefit analysis. The total cost to New Yorkers in higher utility bills because of the price fixing came to $300 million. Morgan Stanley was paid $21.6 million for handling the swap agreement. And the financial penalty imposed on Morgan Stanley? An inconceivably low $4.8 million. In addition the bank didn’t have to admit any wrongdoing. There will be no further prosecution.
Anyone who read this story had all the facts necessary to conclude that something is terribly, even criminally wrong here. The Times is to be commended for going that extra step and providing a full cost-benefit analysis. I hope it can become a template for all political and business reporters.
- Sad But True: Corporate Crime Does Pay (alternet.org)
- Encouraging Corporate Crime (ilsr.org)
- Business Groups Take Left Flank (counterpunch.org)
- 6 Things You Should Know About the $21 Trillion the World’s Richest People Are Hiding In Tax Shelters | Alternet (mbcalyn.com)
- Play Defense Against Corporate Criminals (econmatters.com)
- (Corporate) Crime Most Definitely Pays (ilsr.org)
- Links 8/20/12 (nakedcapitalism.com)
- Corporate Crime Makes Economic Sense (businessinsider.com)
- Corporate Crimes: Pharmaceuticals (insomniacanonymous.wordpress.com)
- Is crime rational? (economist.com)
Romney and Ryan Have Not Given Voters One Single Reason to Trust Them
By: Rmuse August 17th, 2012
One characteristic of being a human is making mistakes whether they are from bad judgment, forgetfulness, or misunderstanding, and only the Christian bible’s Jesus Christ was a perfect man if one subscribes to that ideology. Most Americans would not hold it against a politician if they made mistakes or bad decisions, but when a pattern develops over time, voters should be suspicious. A candidate for the nation’s highest office should be above suspicion if they expect to win the trust and confidence of the people, but as Americans are learning more about Willard Romney and his running mate Paul Ryan, it appears there is a pattern of malfeasance and possible illegal activities that should be a warning that both men are not trustworthy and certainly not suited for the highest offices in the land.
It was less than a week ago that Romney named Paul Ryan as his running mate, and already there are questions about insider trading and omitting information on financial disclosures. Now, Ryan might be excused for inadvertently omitting assets on one year’s disclosure, but apparently he failed to list “between $15,001 and $50,000 in 2010, and between $100,001 and $1 million last year.” Ryan used Romney’s “retroactive” excuse and only included the trust he and his wife inherited from her mother while being vetted by the Romney campaign, and it leaves a suspicious person wondering; if he was not chosen as a running mate, would he have ever listed such a large amount of money of his disclosures?
Within the past week, there were questions about whether Ryan was guilty of insider trading during the financial meltdown when he sold stocks of several major banks after learning from then-Treasury Secretary Paulson that Congress would have to approve a bailout to avert a total meltdown of the financial system. Selling bank stocks all at once is questionable, but within hours he purchased stocks in Paulson’s old firm Goldman Sachs. There is no way to know for sure if Ryan learned about the dire condition of the system from the White House before Paulson spoke to congressional leaders, but the appearance of impropriety adds to a lack of transparency and willingness to profit from information the public was shielded from.
It is a stretch to believe anything coming out of the Romney campaign because Willard has lied about his alleged departure date from Bain Capital, and based on SEC filings, he did not leave until well after February 1999. When the SEC filings were exposed, Romney conveniently came up with the “retroactive retirement” story to cover his lies and filings that clearly show he was still in charge at Bain Capital till at least August 2001 and possibly longer.
There were questions this week about whether or not the Romney campaign received donations from foreign sources during his campaign tour adding fuel to questions of his adherence to the law. It is against campaign finance law to accept donations from foreign sources, but without disclosure laws for contributions to super-pacs, it is a difficult crime to prove. In January 2012, the Supreme Court issued an order upholding prohibitions against foreigners making contributions to influence American elections. However, hundreds of foreign corporations already play an integral and legal role by donating to super-pacs and influencing American elections through their subsidiaries. If Romney were not prone to lying, he may not come under suspicion and scrutiny, but like a common criminal, secrecy and deceit are Willard’s modus operandi.
The biggest question about Romney is his refusal to release more than two years of tax returns. There is a reason Romney is willing to undergo intense pressure and repeated calls from Democrats and Republicans alike to release his tax returns, and if he did not have anything to hide, he would have released the returns when he was close to garnering enough delegates to clinch the Republican nomination. Yesterday in South Carolina Romney said he paid no less than 13% in income taxes, and that the American people would just have to trust he was telling the truth. Interestingly, Romney repeated something Mrs. Willard said during an interview when asked about their taxes and it centers on their charitable donations. Willard said that if you figured in the 10% he gives to charity with his remarkably low 13%, then he pays 23% of his income, but giving 10% to the LDS cult is not paying income taxes. When his wife was questioned about why they did not release more than two years of returns, she also cited that they “give 10% to charity” and they were not releasing any more returns. What is a recurring theme in Mrs. Willard’s answers to tax return questions is that if they release any more, it will give their opponents something to attack, so why she, or her husband, continue touting their 10% donations to Mormons is a source of interest; and suspicion.
It is difficult, no impossible, to believe anything coming out of the Romney-Ryan campaign and it is based on more than just their proclivity for lying. The possibility that Ryan was involved in insider trading is certainly plausible, and there is a reason he conveniently had an “inadvertent omission” of a trust that is worth from $1-5 million dollars. As Sarah Jones said yesterday, “the murky money of Romney-Ryan is becoming the defining narrative of the Republican ticket,” but it is more than just murky money; it is a culture of secrecy, denial, and concealment that defines Romney and Ryan and induces even trusting Americans to consider both men are at least shady, and possibly guilty of illegal activity. It is a good thing SEC filings are open to public scrutiny, because without them, it would be nearly impossible to prove Willard was still running Bain Capital post-1999. Income tax returns are not open to the public and it is why Romney is desperate to keep secrets hidden regardless that63% of Americans demand transparency, and that he release more than just two years of returns.
Honestly, one is tempted to call Willard Romney and Paul Ryan criminals for their questionable financial dealings and it is becoming more evident every day that Romney’s departure from Bain Capital is steeped in something that must be illegal, but without substantiated and verifiable proof, it is just conjecture. One thing is certain; there are records, court documents, or SEC filings somewhere that tie Willard to damning evidence as to why he left Bain and why he refuses to release tax returns dating back to 1999. He is hiding something and desperate to keep it secret or transparency would not be anathema to his presidential aspirations. It is the same scenario with Paul Ryan who is only able to squirm out of insider trading charges because there is no definitive proof he did not get advanced warning from the Bush White House about the looming bailout that prevented a financial meltdown in which he profited by buying stock in the Treasury secretary’s former bank.
Americans may never know the extent of crooked dealings and concealed money associated with Romney and Ryan and it is shameful that transparency is plague to them. They cannot be trusted for myriad reasons, but primarily because they are secretive liars when they should be an open book to seek the highest offices in the land and expect Americans to trust them with America’s security and economic stability. The truth is that they have not given one single reason to trust them, and yet that is Romney’s demand whether it is lying about his tax returns, or when he separated from Bain Capital. The thought of him and Ryan controlling the executive branch should frighten the life out of every American, because based on their “murky money” records and inclination to lie, there are plenty of reasons to be terrified at what two sleazy crooks would do if they win the most powerful offices in the world.
- Romney and Ryan Have Not Given Voters One Single Reason to Trust Them (politicususa.com)
- Romney stumbles badly on Medicare – The Maddow Blog (mbcalyn.com)
- The Internet Gives Paul Ryan the Sarah Palin Treatment – Politics – The Atlantic Wire (mbcalyn.com)
- News from The Associated Press (mbcalyn.com)
- Team Obama: Ryan ‘falls flat’ with voters, like Palin and Quayle – The Hill – covering Congress, Politics, Political Campaigns and Capitol Hill | TheHill.com (mbcalyn.com)
- Mitt’s plot to confuse you – Salon.com (mbcalyn.com)
- Paul Ryan is no Sarah Palin – PostPartisan – The Washington Post (mbcalyn.com)
- Romney Wants His Risky Pick to Play It Safe (abcnews.go.com)
- Romney Family Overruled Advisers (politicalwire.com)
- Editorial: Romney makes a radical choice in Paul Ryan (denverpost.com)
Revealed: Romney Campaign’s Attempts to Deny Paul Ryan’s Insider Trading Don’t Add Up
Team Romney wants you to believe Ryan didn’t really profit from privileged information. Don’t buy it.
August 14, 2012
Photo Credit: AFP
Over the weekend, the Richmonder blog broke what looked like a whopper of a story: that Republican vice-presidential hopeful Paul Ryan had lined his pockets from information he had obtained from a now-legendary meeting that took place on September 18, 2008. On that day, Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson broke the news to congressional leaders that they would have to approve a bailout to avert a complete meltdown of the financial system.
America was lurching toward catastrophe. But some folks were apparently thinking about their stock portfolios.
Checking through Ryan’s financial disclosure reports, the Richmonder discovered that Ryan had sold the stocks of several major banks that day, while purchasing – surprise! – stock in Paulson’s old firm Goldman Sachs. The story quickly circulated through the media.
The Romney campaign rapidly issued denials, based on three separate — and clearly false — claims: 1) the trades were not individual stock trades, but trades made as part of an index that trades big blocs of stocks according to preset formulas; 2) the meeting took place in the evening, after markets were closed, so the meeting could not have played a role in Ryan’s trading decisions; and 3) the stocks traded within a trust over which Ryan had no direct authority.
In many quarters, acceptance of the denials came almost as fast as the news of the original report. Benjy Sarlin of Talking Points Memo issued a report“debunking” the Richmonder story, stating that “the rumor, which spread rapidly across the Internet, doesn’t hold up to scrutiny.” Matt Yglesias over at Slate, who had first credited the story, backtracked, apologizing that he had been too “credulous” in accepting the Richmonder report.
First of all, the Romney campaign’s claim that the transactions were index trades is not consistent with what’s in the original disclosure reports. AlterNet discussed the controversy with money and politics expert Thomas Ferguson, who has written extensively on the bailout. He explained, “Ryan did own some index-based securities, but they stand out in the summaries. They are different from the many trades Ryan was making in individual stocks. It is perfectly obvious that he sold shares in Wachovia, Citigroup and J. P. Morgan on September 18 and he bought shares in Paulson’s old firm, Goldman Sachs, on the same day. If these were index trades, what’s on the form is nonsense.”
While it’s not possible to pinpoint exactly what Ryan knew and when he knew it, the whole episode becomes more disturbing the deeper you look into it.
Citing accounts from congressional circles, Ferguson explains that Paulson had been told by the White House not to discuss the darkening situation with Congress. But sometime between 2:30 and 3pm on September 18, Paulson finally spoke with then-Speaker of the House Nancy Pelosi. He told her that a very bad situation had developed, and that it could involve something much worse than the failure of a giant bank, possibly even a broad collapse of the whole economy. Pelosi immediately demanded that Paulson come over and brief congressional leaders. He agreed. Ferguson reports that his sources say the meeting did indeed begin after markets closed. But he also notes that word of the meeting circulated to the leaders well before markets closed at 4pm.
Since Ryan is a Republican, he may well have gotten word from the White House about the gravity of the situation even earlier. If you knew that Hank Paulson and Ben Bernanke were coming to brief you as stock markets fell around the world, that’s really all you needed to know to do the trades in Ryan’s portfolio.
If you swallow the idea that Ryan just happened to buy Goldman stock that day — a day he just happened to have a meeting with Hank Paulson, the firm’s former CEO, well, then I have some unicorns I’d like to introduce you to.
Ferguson scoffs at the notion: “There’s a lot we don’t know about the famous waiver that Paulson is said eventually to have gotten to talk to his old firm. When I asked about it under a Freedom of Information request, virtually everything I got back was blacked out. But I’ll tell you this. It was not exactly an Einsteinian inspiration to guess that Paulson’s old firm might be a good bet if things were so bad that Hank Paulson was coming to the Hill.”
Sometimes you win, sometimes you lose. But if you’re a member of Congress, the odds are curiously in your favor. As I reported on AlterNet several months ago, in-depth research undertaken in 2004 considered to be the baseline work in the field revealed that from 1993-1998, US senators were beating the market by 12 percentage points a year on average. Corporate insiders only beat the market by a measly 5 percent. Typical households, in contrast, underperformed by 1.4 percent.
And as to the Romney campaign’s claim that Ryan was not legally in control of his investments, let’s just say that this idea gives the notion of the “Invisible Hand” new meaning.
What’s most disturbing is the notion of a man like Paul Ryan focusing so heavily on his portfolio while his country was in peril. Ryan’s surely a guy who would answer the phone at 3am – provided it’s his stockbroker calling.
- Revealed: Romney Campaign’s Attempts to Deny Paul Ryan’s Insider Trading Don’t Add Up (alternet.org)
- Yes, Paul Ryan’s Flacks Snookered Benjy Sarlin: Republicans Lie, All the Time, About Everything Blogging (delong.typepad.com)
- Is Paul Ryan A Terrible Stock Trader, Is His Broker Confused, Or Is There Something Else Going On Here? (businessinsider.com)
- Paul Ryan Dumped A Bunch Of Bank Stocks The Same Day As Congressional Leaders Met With Hank Paulson During The Crisis (businessinsider.com)
- Can You TRUST Him? Paul Ryan sold shares on same day as private briefing of banking crisis (sgtreport.com)
- Paul Ryan sold shares on same day as private briefing of banking crisis (guardian.co.uk)
- Hey Paul Ryan haters, your congressional insider trader suspect actually is Sheldon Whitehouse (legalinsurrection.com)
- Reflections on Paul Ryan’s Transactions in Individual Bank Stocks in 2008 (delong.typepad.com)
- Ryan Made Series of Bank Trades in 2008 During Financial Crisis (news.firedoglake.com)
- Brad DeLong: Reflections on Paul Ryan’s Transactions in Individual Bank Stocks in 2008 (huffingtonpost.com)
Wall Street’s Biggest Heist Yet? How the High Wizards of Finance Gutted Our Schools and Cities | Economy | AlterNet
Wall Street’s Biggest Heist Yet? How the High Wizards of Finance Gutted Our Schools and Cities
The complex machinations that pitted county treasurers against the deceptive wizards of Wall Street.
July 17, 2012
Wall Street banks have hollowed out our communities with fraudulently sold mortgages and illegal foreclosures and settled the crimes for pennies on the dollar. They’ve set back property records to the early 1900s, skipping the recording of deeds in county registry offices and using their own front called MERS. They lobbied to kill fixed pension plans and then shaved a decade of growth off our 401(K)s with exorbitant fees, rigged research and trading for the house.
When much of Wall Street collapsed in 2008 as a direct result of their corrupt business model, their pals in Washington used the public purse to resuscitate the same corrupt financial model – allowing even greater depositor concentration at JPMorgan and Bank of America through acquisitions of crippled firms.
And now, Wall Street may get away with the biggest heist of the public purse in the history of the world. You know it’s an unprecedented crime when the conservative Economist magazine sums up the situation with a one word headline: “Banksters.”
It has been widely reported that Libor, the interest rate benchmark that was rigged by a banking cartel, impacted $10 trillion in consumer loans. Libor stands for London Interbank Offered Rate and is supposed to be a reliable reflection of the rate at which banks are lending to each other. Based on the average of that rate, after highs and lows are discarded, the Libor index is used as a key index for setting loan rates around the world, including adjustable rate mortgages, credit card payments and student loans here in the U.S.
But what’s missing from the debate are the most diabolical parts of the scam: how a rigged Libor rate was used to defraud municipalities across America, inflate bank stock prices, and potentially rig futures markets around the world. All while the top U.S. bank regulator dealt with the problem by fiddling with a memo to the Bank of England.
Libor is also one of the leading interest rate benchmarks used to create payment terms on interest rate swaps. Wall Street has convinced Congress that it needs those derivatives to hedge its balance sheet. But look at these statistics. According to the Office of the Comptroller of the Currency, as of March 31, 2012, U.S. banks held $183.7 trillion in interest rate contracts but just four firms represent 93% of total derivative holdings: JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
As of March 31, 2012, there were 7,307 FDIC insured banks in the U.S. according to the FDIC. All of those banks, including the four above, have a total of $13.4 trillion in assets. Why would four banks need to hedge to the tune of 13 times all assets held in all 7,307 banks in the U.S.?
The answer is that most swaps are not being used as a hedge. They are being used as a money-making racket for Wall Street.
The Libor rate was used to manipulate, not just tens of trillions of consumer loans, buthundreds of trillions in interest rate contracts (swaps) with municipalities across America and around the globe. (Milan prosecutors have charged JPMorgan, Deutsche Bank, UBS and Depfa Bank with derivatives fraud and earning $128 million in hidden fees.)
Rigging Libor also inflated the value of the trash that Wall Street was parking in 2008 and 2009 at the Federal Reserve Bank of New York to extract trillions in cash at near zero interest-rate loans from the public purse. When rates rise, bond prices decline. When rates decline, bond prices rise. The Federal Reserve made loans to Wall Street based on a percentage of the face value of their bonds and mortgage backed securities that they presented for collateral. By pushing down interest rates, the banks were getting a lift out of their collateral, allowing them to borrow more.
The banks that cheated on Libor were also perpetrating a public fraud in terms of how the market perceived their risk. The Libor rate they each reported every morning to compile the index was based on the rate they would pay to borrow from other banks, thus the name London Interbank Offered Rate or Libor. So, for example, even though Citibank’s credit default swap prices were rising dramatically during the 2008 crisis, suggesting it was in trouble, it was reporting low borrowing costs to the Libor index.
Because interest rates impact the price movement of stocks, the rigged lowering of the Libor rate put a false prop under the stock market as well as inflated individual bank stocks. There is also a very strong suggestion that there was insider trading on futures or swaps markets based on the spread between the one month and three month Libor rates. One trader’s email to the Libor submitter reads: “We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix).”
In simple terms, Wall Street and its colleagues in the global banking cartel have left us clueless as a nation about the validity of our markets, how much hidden debt liability our local and state governments really have, and where the stock market would actually be if interest rates had not been rigged.
Let’s explore the almost incomprehensible rip off of our now struggling communities. Here’s how the swap deals typically worked, although there were Byzantine variations called constant maturity swaps (CMS), swaptions, and snowballs. These complex machinations pitted the brains of county treasurers or school boards against the deceptive wizards of Wall Street.
Municipalities typically entered into an interest rate swap because Wall Street’s fast talking salesmen showed up with incomprehensible power point slides wearing $3,000 suits and assured municipal officials it would lower their overall borrowing costs on their municipal bond issues. A typical deal involved the municipality issuing variable rate municipal bonds and simultaneously signing a contract (interest rate swap) with a Wall Street bank that locked it into paying the bank a fixed rate while it received from the bank a floating interest rate tied to one of two indices. One index, Libor, was operated by an international bankers’ trade group, the British Bankers Association. The other index, SIFMA, was operated by a Wall Street trade association. Neither was an independent monitor for the public interest.
When the two sets of cash flows are calculated, the side that generates the larger payments receives the difference between the sums. In many cases, continuing to this day, the municipality ended up receiving a fraction of one percent, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer. If the local or state governments or school boards wanted out of the deal, a multi-million dollar penalty fee could be charged based on the rate structure and notional (face amount) of the swap.
We learned late last month that the Libor rate the municipalities were receiving was manipulated downward from at least 2007 to 2010 by a global banking cartel. The U.S. dollar Libor panel included U.S. banks JPMorgan Chase, Citibank (whose parent is the former ward of the taxpayer, Citigroup), and Bank of America. Canadian prosecutors have implicated JPMorgan and Citibank in a criminal probe, as well as other banks. A whistleblower has provided the names of traders that are alleged to have taken part in the scheme and turned over emails, according to affidavits filed with the Ontario Superior Court.
At least 12 global banks are being investigated by U.S., British and European authorities. Barclays admitted in June that its employees rigged Libor rates. It paid $453 million in fines to U.S. and British authorities and turned over emails showing its traders and those at other, as yet unnamed, banks gave instructions on how the rates were to be rigged on specific dates.
No one has accused SIFMA, the other interest rate benchmark used to set variable rates of interest on municipal bonds, of overseeing a rigged index but it is certainly not a comfort to understand just what SIFMA is. On its web site, SIFMA defines itself as follows: “The Securities Industry and Financial Markets Association (SIFMA) represents the industry which powers the global economy. Born of the merger between the Securities Industry Association and the Bond Market Association, SIFMA is the single powerful voice for strengthening markets and supporting investors — the world over.”
Notice that the words “Wall Street” do not appear in this description and yet, that is precisely what SIFMA is: a Wall Street trade association that viciously lobbies for Wall Street. (As for “supporting investors,” it should be sued for false advertising.) In February of this year, it even sued the top regulator of derivatives, the Commodity Futures Trading Commission in Federal Court to stop it from setting limits on the maximum size of derivative bets that can be taken in the market.
From 2000 through 2011, SIFMA spent $96.4 million lobbying Congress on behalf of Wall Street. In the 2008 election cycle, according to the Center for Responsive Politics, SIFMA spent $865,000 in political donations, giving to both Republicans and Democrats.
In March 2010, the Service Employees International Union (SEIU) issued a report indicating that from 2006 through early 2008 banks are estimated to have collected as much as $28 billion in termination fees from state and local governments who were desperate to exit the abusive interest rate swaps. That amount does not include the ongoing outsized interest payments that were and are being paid. Experts believe that billions of abusive swaps may be as yet unacknowledged by embarrassed municipalities.
In 2009, the Auditor General of Pennsylvania, Jack Wagner, found that 626 swaps were done in Pennsylvania between October 2003 and June 2009, covering $14.9 billion in municipal bonds. That encompassed 107 of Pennsylvania’s 500 school districts and 86 other local governments. The swaps were sold to the municipalities by Citibank, Goldman Sachs, JPMorgan and Morgan Stanley.
In one case cited by Wagner, the Bethlehem Area School entered into 13 different swaps, covering $272.9 million in debt for school construction projects. Two swaps which had concluded at the time of Wagner’s investigation cost taxpayers $10.2 million more than if the district had issued a standard fixed-rate bond or note and $15.5 million more than if the district had simply paid the interest on the variable-rate note without any swaps at all.
And therein lies the rub. Municipalities never needed these nonsensical weapons of mass deception. Muni bond issuers could have simply done what muni investors have done for a century – laddered their bonds. To hedge risk, an issuer simply has bonds maturing along a short, intermediate and long-term yield curve. If rates rise, they are hedged with the intermediate and long term bonds. If rates fall, the short munis will mature and can be rolled over into the lower interest rate environment. Municipal issuers are further protected by being able to establish call dates of typically 5 years, 7 years, or 10 years when they issue long terms bonds. They pay moms and pops and seniors across America, who buy these muni bonds, a small premium of usually $10 to $20 per thousand face amount and call in the bonds if the interest rate environment becomes more attractive for issuance of new bonds.
According to the June 30, 2011 auditor’s report for the City of Oakland, California, the city entered into a swap with Goldman Sachs Mitsui Marine Derivatives Products in connection with $187.5 million of muni bonds for Oakland Joint Powers Financing Authority. Under the swap terms, the city would pay Goldman a fixed rate of 5.6775 percent through 2021 and receive a variable rate based on the Bond Market Association index (that was the predecessor name to the SIFMA index). In 2003, the variable rate was changed from being indexed to the Bond Market Association index to being indexed at 65 percent of the one-month Libor rate.
The city is still paying the high fixed rate but it’s receiving a miniscule rate of less than one percent. According to local officials, the city has paid Goldman roughly $32 million more than it has received and could be out another $20 million if it has to hold the swap until 2021. A group called the Oakland Coalition to Stop Goldman Sachs succeeded in getting the City Council to vote on July 3 of this year to stop doing business with Goldman Sachs if it doesn’t allow Oakland to terminate the swap without penalty. It called the vote “a huge victory for both the city of Oakland and for the people throughout the world living under the boot of interest rate swaps.”
The Mayor of Baltimore, the Baltimore City Council, the City of New Britain Firefighters’ and Police Benefit Fund of Connecticut have filed a class action lawsuit in Federal Court in New York over the rigging of Libor. The plaintiffs state that the City of Baltimore purchased hundreds of millions of dollars of derivatives tied to Libor while the New Britain Firefighters and Police Benefit Fund purchased tens of millions. They are suing the banks involved in submitting the Libor rates.
Wall Street’s boot on interest rate swaps dates back at least 17 years. In February 1995, Smith Barney (now co-owned by Citigroup and Morgan Stanley) fired Michael Lissack as a managing director in the firm’s public finance department after he publicly accused the firm of cheating Dade County, Florida out of millions on an interest rate swap. Lissack went on to become the scourge of Wall Street by expertly detailing how counties and states were being ripped off by Wall Street. He even set up this amusing web site to do battle with the firm. The case became known as the “yield burning case,” an esoteric term that the public could hardly fathom, much like the Libor scandal today.
In 2000, the Securities and Exchange Commission settled the yield burning matter with 21 firms and imposed fines of $172 million, a minor slap on the wrist given the profits of the firms. Arthur Levitt was Chairman of the SEC at the time and came from the ranks of Wall Street.
Which brings us full circle. If you’ve ever wondered where all of those revolving doors between Wall Street and Washington would eventually lead us, we’ve just found out. It leads to the regulators becoming just as jaded and compromised as Wall Street. While Wall Street banks and their global counterparts were grabbing the loot, their regulator was watching carefully behind the wheel of the getaway car for at least four years.
This past Friday, the Federal Reserve Bank of New York turned over emails and documents showing that Timothy Geithner, the sitting U.S. Treasury Secretary of the United States, knew at least as early as 2008 that Libor was being rigged. At the time, Geithner was the President and CEO of the Federal Reserve Bank of New York – the top regulator of Wall Street’s largest banks. As far as we know currently, Geithner did nothing more to stop the practice than send an email with recommendations to Mervyn King, Governor of the Bank of England. Libor rigging continued through at least 2010.
As the U.S. grapples with intractable wealth disparity and the related ills of unemployment and recession, we need to understand that this was not merely a few rascals rigging some esoteric index in London. This was an institutionalized wealth transfer system on an almost unimaginable scale.
- Wall Street’s Biggest Heist Yet? How the High Wizards of Finance Gutted Our Schools and Cities (alternet.org)
- Libor Scandal: The Unvarnished Story of Wall Street ‘ s Heist of the Century (ilene.typepad.com)
- The end of Wall Street as we know it? (independent.co.uk)
- Citi may have been the biggest Libor liar of all (finance.fortune.cnn.com)
- Big banks keep ripping us off (salon.com)
- Libor Scandal Shows Many Flaws in Rate-Setting (dealbook.nytimes.com)
- Libor scandal – the net widens (independent.co.uk)
- The Wall Street Scandal of all Scandals (wallstreetpit.com)
- Geithner Questioned Libor’s Credibility in 2008 (newser.com)
- Lie-bor: Could the Biggest Scam in History Maybe Destroy Wall Street? (motherboard.vice.com)
Recent settlements by the Securities and Exchange Commission (SEC) have sent a dangerous message to Wall Street: feel free to lie freely to investors and shareholders as long as you have deep pockets.
In 2007, Citigroup told investors it had $13 billion in subprime exposures, knowing the figure was in excess of $50 billion. It got caught and on July 29, 2010 paid $75 million to settle charges with the SEC. Its CFO, Gary Crittenden, was fined a puny $100,000 and the head of its Investor Relations Department, Arthur Tildesley, was fined an even punier $80,000. That sent a clear message to Wall Street, lying about the risks you are taking or what’s on your balance sheet results in a slap on the wrist and some chump change. Lying has now morphed into its own profit center.
Also in July 2010, Goldman Sachs settled with the SEC for $550 million over its infamous Abacus deal where a hedge fund manager, John Paulson, hand picked the collateralized debt obligations that went into the deal and then wagered they would decline in value. Goldman was aware of this and declined to tell investors that bought into the deal.
Under the Securities Exchange Act of 1934, persons and/or corporations that make material omissions or misrepresentations can be charged in civil actions by the SEC as well as criminal securities fraud actions by the Department of Justice.
On June 19, 2012, when SEC Chair, Mary Schapiro, testified before the House Financial Services Committee regarding the $2 billion and growing losses at JPMorgan Chase, she indicated that the agency is reviewing the appropriateness of the disclosures that JPMorgan Chase made to the public.
Schapiro testified: “The SEC’s rules require comprehensive disclosure about the risks faced by a public company, including line item requirements for disclosure of specific information about risk…For example, Item 305 of Regulation S-K requires quantitative disclosure of a company’s market risk exposures, which includes exposures related to derivatives and other financial instruments.”
According to securities law experts, prosecutions by the SEC and DOJ for misstatements or omissions are not limited to SEC filings made under the 1934 Act. Any manner of publicized misstatement or omission can create liability. Courts have ruled that any deceit that materially affects the purchase or sale of securities is actionable. Lying through omission is legally interpreted as making statements that present an incomplete or inaccurate picture, and withholding other material information necessary to present the entire truth.
In a landmark 1976 U.S. Supreme Court decision, TSC Industries, Inc. v. Northway, Inc., Justice Thurgood Marshall, writing for the court, explained:
“Lying through omission consists of making statements that paint an incomplete or inaccurate picture, and not revealing other material information necessary to present the entire truth. The federal securities laws require public companies, whenever they speak, to disclose all material information that would be necessary to present the truth entirely.”
Against that backdrop comes the 10Q (first quarter) financial filing that JPMorgan Chase submitted to the SEC. The relevant portion is as follows:
“Since March 31, 2012, CIO [Chief Investment Office of JPMorgan Chase] has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
“The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.”
Nothing in this statement suggests that a momentous event has occurred – momentous enough to bring in the Department of Justice, the FBI, three Congressional hearings and the shaving, at one point, of $30 billion off the market capitalization of the firm.
What the statement does not capture is the following: JPMorgan Chase was selling tens of billions of dollars of credit default insurance to hedge funds in return for a large up-front payment and a quarterly income stream. It sold that protection in an off-the-run (outdated) derivatives index that is illiquid. AIG Financial Products blew up the behemoth AIG Insurance selling credit default insurance. The U.S. taxpayer had to bail out AIG and pay off that insurance to Wall Street firms like Goldman Sachs and JPMorgan Chase. That was just a little over three years ago. Should Congress and the regulators be caught off guard once again, there will be hell to pay.
On May 10, 2012, the same day JPMorgan filed its 10Q with the SEC, JPMorgan Chairman and CEO, Jamie Dimon, said on a conference call with analysts that the existing credit derivative losses were $2 billion and could grow. What he did not mention was anything about an internal document existing at that time that said the losses could grow to $9 billion. The difference between $2 billion and $9 billion is a very material number.
On June 29, 2012, Jessica Silver-Greenberg and Susanne Craig reported in the New York Times that “In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.” The operative words in that sentence are “April” and “$9 billion.”
The head of the Chief Investment Office in April was Ina Drew. Drew reported directly to Dimon. He admitted that in his testimony to Congress. If Jamie Dimon withheld from shareholders and investors that an internal report existed on May 10, 2012 (the date the firm’s 10Q was filed with the SEC and the date he personally spoke with analysts) indicating that these derivative losses could reach $9 billion, charges are most likely to be brought and massive class action lawsuits will, indeed, commence.
Oh what a tangled web we weave when first we practice to deceive.
- JPMorgan Chase CEO Dimon: Bank wasn’t gambling (cbsnews.com)
- JPMorgan’s gambling disrupted the markets more than imagined (americablog.com)
- Former Congressional, SEC Officials Take a Spin through JPMorgan’s Revolving Door (pogoblog.typepad.com)
- Report: JPMorgan trading losses may reach $9B (cbsnews.com)
- No sign of shareholder revolt against JPMorgan Chase CEO Jamie Dimon (cbsnews.com)
- A look at major financial settlements, at a glance (seattletimes.nwsource.com)
- This Is Clearly Going To Cost JPMorgan Much More Than $2 Billion (businessinsider.com)
- The Coming Derivatives Crisis – Bankers Gambling Addiction (vaticproject.blogspot.com)
- JPMorgan Trading Loss May Reach $9 Billion – NYTimes.com (nadernazemi.com)
- JPMorgan Chase Gets $14 Billion Per Year In Government Subsidy (fromthetrenchesworldreport.com)
Insight: Morgan Stanley cut Facebook estimates just before IPO
By Alistair Barr | Reuters – 12 hrs ago
Facebook Inc. CEO Mark Zuckerberg …
The sun rises behind the entrance …
(Reuters) – In the run-up to Facebook‘s $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank’s consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.
The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast.
They say it may have contributed to the weak performance of Facebook shares, which sank on Monday – their second day of trading – to end 10 percent below the IPO price. The $38 per share IPO price valued Facebook at $104 billion.
The change in Morgan Stanley’s estimates came on the heels of Facebook’s filing of an amended prospectus with the U.S. Securities and Exchange Commission (SEC), in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date is less lucrative than advertising on a desktop.
“This was done during the roadshow – I’ve never seen that before in 10 years,” said a source at a mutual fund firm who was among those called by Morgan Stanley.
JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook’s May 9 SEC filing, according to sources familiar with the situation.
Morgan Stanley declined to comment and Devitt did not return a phone message seeking comment. JPMorgan and Goldman both declined to comment.
Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors. Investment bank analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks – that was stipulated in a settlement by major banks with regulators following a scandal over tainted stock research during the dotcom boom.
The people familiar with the revised Morgan Stanley projections said Devitt cut his revenue estimate for the current second quarter significantly, and also cut his full-year 2012 revenue forecast. Devitt’s precise estimates could not be immediately verified.
“That deceleration freaked a lot of people out,” said one of the investors.
Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.
“They definitely lowered their numbers and there was some concern about that,” he said. “My biggest hedge fund client told me they lowered their numbers right around mid-roadshow.”
That client, he said, still bought the issue but “flipped his IPO allocation and went short on the first day.”
Sweet said analysts at firms that are not underwriting IPOs often change forecasts at such times. However, he said it is unusual for analysts at lead underwriters to make such changes so close to the IPO.
“That would be very, very unusual for a book runner to do that,” he said.
The lower revenue projection came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34-$38, and before Facebook increased the number of shares being sold by 25 percent.
The much-anticipated IPO has performed far below expectations, with the shares barely staying above the $38 offer price on their Friday debut and then plunging on Monday.
Companies do not make their own financial forecasts prior to an IPO, and underwriters are generally barred from issuing recommendations on the stock until 40 days after it begins trading. Analysts often rely on guidance from the company in building their forecasts, but companies doing IPOs are not permitted to give out material information that is not available to all investors.
Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The firm declined to comment when asked who was told about the research.
“It’s very rare to cut forecasts in the middle of the IPO process,” said an official with a hedge fund firm who received a call from Morgan Stanley about the revision.
- Insight: Morgan Stanley cut Facebook estimates just before IPO (shortformblog.com)
- Insight: Morgan Stanley cut Facebook estimates just before IPO (jhaines6.wordpress.com)
- Did Facebook IPO investors ‘freak’ after Morgan Stanley cut its revenue target? (theglobeandmail.com)
- Insight: Morgan Stanley cut Facebook estimates just before IPO (reuters.com)
- Morgan Stanley cut Facebook view pre-IPO: report (marketwatch.com)
- Morgan Stanley analyst cut Facebook revenue forecasts during IPO roadshow (mercurynews.com)
- The Facebook earnings-forecast scandal (blogs.reuters.com)
- Morgan Stanley blamed for Facebook flop (business.financialpost.com)
- Morgan Stanley Cut Facebook’s Estimates, Then Increased the Offering (thestreet.com)
- Behind Facebook’s Flop: Morgan Stanley Cut Forecast (newser.com)
MAY 17, 2012
For Average Investors, Long Odds on a Big Facebook PaydayBY NATHANIEL POPPER
Facebook shares will be tempting to buy when they start trading on Friday. The company has hefty profit margins, a household name and a shot at becoming the primary gateway to the Internet for much of the planet.
But if history offers any lesson, average investors face steep odds if they hope to make big money in a much-hyped stock like Facebook.
Sure, Facebook could be the next Google, whose shares now trade at more than six times their offering price. But it could also suffer the fate of Zynga, Groupon, Pandora and a host of other start-ups that came out of the gate strong, then quickly fell back.
Even after Facebook supersized its offering with plans to dole out more shares to the public, most retail investors will have a hard time getting shares in the social networking company at a reasonable price in its first days of trading.
Facebook’s I.P.O. values the company at more than $104 billion. And the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading on Friday, the so-called one-day pop that is common for Internet offerings. At either level, Facebook’s price is likely to assume a growth rate that few companies have managed to sustain.
New investors, in part, are buying their shares from current owners who are taking some of their money off the table, a sign that the easy profits may have been made.Goldman Sachs, the PayPal co-founder Peter Thiel, and the venture capital firms DST Global and Accel Partners are all selling shares in the offering.
“It is a popular company, but it is still a highly speculative stock,” said Paul Brigandi, a senior vice president with the fund manager Direxion. “Outside investors should be cautious. It doesn’t fit into everyone’s risk profile.”
For the farsighted and deep-pocketed investors who got in early, Facebook is turning out to be a blockbuster. But by the time the first shares are publicly traded, new investors will be starting at a significant disadvantage.
Following the traditional Wall Street model, Facebook shares were parceled out to a select group of investors at an offering run by the company’s bankers on Thursday evening, priced at $38 a share. But public trading will begin with an auction on the Nasdaq exchange on Friday morning that is likely to push the stock far above beyond the initial offering price.
That is what happened to Groupon last fall. Shares of the daily deals site started trading at $28, above its offering price of $20. It eventually closed the day at $26.11.
The one-day pop is common phenomenon. Over the last year, newly public technology stocks, on average, have jumped 26 percent in their first day of trading, according to data collected by Jay R. Ritter, a professor of finance and an I.P.O. expert at the University of Florida.
In many of the hottest technology stocks, the rise has been more dramatic.LinkedIn, another social networking site, surged 109 percent on its first day in May 2011, and analysts say it is not hard to imagine a similar outcome with Facebook, given the enormous interest.
Unfortunately for investors, the first-day frenzy is not often sustained. In the technology bubble of the late 1990s, dozens of companies, Pets.com and Webvan among them, soared before crashing down.
At the height of the bubble in 2000, the average technology stock rose 87 percent on its first day. Three years later, those stocks were down 59 percent from their first-day closing prices and 38 percent from their offering prices, according to Professor Ritter’s data.
The more recent crop of technology start-ups has not been much more successful in maintaining the early excitement. A Morningstar analysis of the seven most prominent technology I.P.O.’s of the last year showed that after their stock prices jumped an average of 47 percent on the first day of trading, they were down 11 percent from their offering prices a month later. Groupon is now down about 40 percent from its I.P.O. price.
“It’s usually best to wait a few weeks to let the excitement wear off,” said James Krapfel, an I.P.O. analyst at Morningstar who conducted the analysis. “Buying in the first day is not generally a good strategy for making money.”
There are, of course, a number of major exceptions to this larger trend that would seem to provide hope for Facebook. Google, for instance, started rising on its first day and almost never looked back.
Even among the success stories, though, investors often have had to go through roller coaster rides on their way up. Amazon, for instance, surged when it went public in 1997 at $18 a share. But the stock soon sputtered, and it did not reach its early highs again until over a decade later. The shares now trade near $225.
More recently, LinkedIn has been trading about 140 percent above its offering price of $45, enough to provide positive returns even for investors who bought in the initial euphoria. But those investors had to sweat out months when LinkedIn stock was significantly down.
Apple is perhaps the clearest example of the patience that can be required to cash in on technology stocks. Nearly two decades after its I.P.O. in 1980, it was still occasionally trading below its first-day closing price, and it was only in the middle of the last decade — when the company began revolutionizing the music business — that it began its swift climb toward $600.
Facebook’s prospects will ultimately depend on the company’s ability to fulfill its early promise. It has a leg up on the start-ups of the late 1990s, which had no profits and dubious business models. Last year, in the seventh year since its founding, Facebook posted $3.7 billion in revenue and $1 billion in profit.
But investors buying the stock even at the offering price are assuming enormous future growth. While stock investors are generally willing to pay about $14 for every dollar of profit from the average company in the Standard & Poor’s 500 index, people buying Facebook at the estimate I.P.O. price are paying about $100 for each dollar of profit it made in the past year.
When Google went public in 2004, investors paid a bigger premium, about $120 for each dollar of earnings. But the search company at the time was growing both its sales and profits at a faster pace than Facebook is currently.
Facebook may be able to justify those valuations if it can keep expanding its profit at the pace it did last year, a feat some analysts have said is possible. But especially after the company recently revealed that its growth rate had slowed significantly in the first quarter, the number of doubters is growing.
“Facebook, by just about any measure, is a great company,” Professor Ritter said. “That doesn’t mean that Facebook will be a great investment.”
- G.M. to Quit Facebook Ad Campaign Worth $10 Million a Year – NYTimes.com (mbcalyn.com)
- Disruptions: Facebook’s Real-Life ‘Spidey Sense’ – NYTimes.com (mbcalyn.com)
- Wanna buy a Facebook share? Why Canadian investors may be out of luck (thestar.com)
- It’s Facebook IPO Week: Here’s Everything You Need to Know [VIDEO] (mashable.com)
- Investor frenzy for Facebook grows (theglobeandmail.com)
- Facebook IPO: Shareholders Looking to Cash Out More (blogs.wsj.com)
- Facebook IPO size increases by 25%, may reach $16B (venturebeat.com)
- A safer play on Facebook shares (business.financialpost.com)
- Utility at What Cost? (jeffnolan.com)
- Facebook IPO shares tough task for small investors (seattlepi.com)