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What the Facebook Fiasco Tells Us About Our Rigged Stock Market

How long will we keep getting Zuckered?
 
 
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In the wake of the JP Morgan blow-up and the Facebook debacle, Americans are contemplating the stock market with a mixture of alarm and disgust. Both are justified. In world of high-speed trading and other manipulations, the ordinary investor who wants to make money over the long haul can easily get screwed by those playing a short-term game. 

On May 18, Facebook went public to relentless mainstream media cheers. As of Thursday, May 24, the stock was down 15 percent of the initial offering of $38 per share. The Internet bubble of 1998-2000 gave us a brutal lesson in what happens when investors shell out gigantic sums for unproven companies. But never mind. Those “rational” creatures neoliberal economists are always going on about -- you know, the kind that operate on “perfect information” -- did what actual humans tend to do. They got overly excited, followed the herd and found out that their information was far from perfect.

Facebook is all about sharing. And rainbows! And unicorns! Actually, it looks as if Zuckerberg and the megabanks that managed the deal decided to share pertinent information about the value of the stock to their…friends. That select group of 1 percenters did not include the public. The Orwellian term bankers like to use for this kind of deception is “selective disclosure.” Shareholders have begun filing lawsuits against Facebook and Morgan Stanley over reports that they deliberately held back negative analyst reports before the company went public. U.S. regulators have launched an investigation to determine whether or not securities laws have been violated.

Why does this happen? Well, mostly because the public is playing a rigged insider game known as the stock market. Generally it goes like this: An IPO, especially one that has been hyped more than the Second Coming, makes a load of cash for a select group of inside investors, both those giving up their shares – people like the founders and the venture capitalists -- and the privileged group of banks that are underwriting the stock issue. When the ordinary investor gets to bid for shares on the stock market, the banks hope to get a big boost in the price, and sail away to their yachts with huge gains. Usually the stock market drops in a few days, and whoops! The ordinary investor is left holding the bag, finding that a big chunk of change has just been handed over to an elite circle of fatcats. The investor can hold on to the stock, gambling that maybe in a few months or years the stock price will go back up. And that’s a big maybe.

But in the case of Facebook, it appears that all the media-driven hype gave the company an opportunity to add a few extra twists to the already rigged game. As William Lazonick, an expert on the American business corporation, put it in an email:

“What seems to have happened with FB is that there was so much hype surrounding the IPO that Zuckerberg et al. were able to convince the Wall Street banks to put more shares on the market at a higher price than had been contemplated, including a lot of shares made available directly to the public at the IPO price as part of the IPO process (usually the public only gets the shares at whatever the market price is once the original shareholders have put them on the market). Too many shares in the IPO at a price that investors judged as too high resulted in a significant drop in the IPO price in the first day.”

 
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