Economy

What the Facebook Fiasco Tells Us About Our Rigged Stock Market

How long will we keep getting Zuckered?

Photo Credit: AFP

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.”

Many of the people who lost money are experienced folks who are looking to make a short-term profit when, as they hope, the price of the stock goes up in the early days after the IPO, partly due to the frenzy. Others are just ordinary people who asked their brokers to get them in on the game when they read about all the excitement in the paper. They may have thought of holding the stock over the long-term. Unfortunately at this point, everybody except that privileged inner circle is feeling a bit like the poor souls at the blackjack table – angry that their money has been lost in a game they were never meant to win. In essence, the entire IPO show is little more than what Lazonick calls an “organized gambling event” where the insiders with the privileged information are usually the ones who come out ahead.

Lots of people are now asking if Facebook’s much-touted prospective earnings justified the IPO price. But guess what? Nobody has a clue what those earnings will be beyond projected advertising revenues for the next six months. And the short-term speculator type investors don’t really care anyway, because they’re just trying to make a  windfall by dumping the stock for a quick capital gain.

Facebook is scrambling to place the blame for the fumbled IPO on technical glitches at NASDAQ, but it seems that the public is not buying what they’re selling on that one. No, it looks like Zuckerberg and the underwriters were just greedy, trying to hustle as much money as possible, the public be damned.

Last weekend, Zuckerberg demonstrated his appreciation of the finer points of greed with a surprise wedding -- right after the IPO -- to his girlfriend of 10 years, Priscilla Chan. We are told the timing was a mere coincidence. Nobody is really buying that one, either. California is a community property state, meaning that everything earned during the marriage belongs to both partners by law, but everything earned before the wedding is kept by the individuals. So if the pair ever decide to divorce, Chan will not be walking away with a penny of Mark’s pre-wedding billions.

Trust is a big part of what’s supposed to make capitalism work. But Americans are increasingly pulling money out of the stock market because they rightfully do not trust it. A 2011 Gallup poll showed the lowest percentage of ownership in the stock market since 1999 (54 percent). 

In January 2012, Gallup found that Americans are more worried about their financial future at any time since 1991. Where, they are wondering, should they put their money? In a mattress, perhaps? And they are going to need money from somewhere, because increasingly even the Democrats have bought the baloney about the need to cut Social Security (which is in perfectly fine fiscal shape). The banks will not stop until they have gotten us to put our retirement money in accounts on which they can charge fees. Make no mistake: this is the foundation of every line about the need to “fix” Social Security by increasing the retirement age, making cost-of-living adjustments, etc. It’s all about the banks wanting that money.

But back to the big lesson here: without transparency, without trust and without accountability, the stock market will continue to widen the increasing chasm between the uberrich and everybody else. As some quaintly put it, we’re all getting Zuckered. 

 

Lynn Parramore is an AlterNet contributing editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of 'Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.' Follow her on Twitter @LynnParramore.