On the Down Low at the Roadshow

An analyst had a quick word
With investors his bankers preferred:
"We've cut our projections
For those with connections,
But won't tell the rest of the herd."

The fallout from the Facebook IPO continues. On Tuesday a spotlight was shown on the practice of IPO underwriters' not disclosing their analysts' estimates of companies' earnings, except to a small group of large institutional clients. Already a troubling practice, these quiet revelations appeared to skirt the letter of the law in the Facebook case. Analysts for Morgan Stanley and the other underwriters all made substantial cuts in their Facebook earnings forecasts during the pre-IPO roadshow, evidently based on information quietly provided by the still-private company. Joining Goldman Sachs in contempt for the retail "muppets" clamoring for $FB shares, the Morgans - J.P. and Stanley - have still not disclosed their estimates, as indeed they may not until 40 days after the IPO date. Reuters finance blogger Felix Salmon gives a full explanation of the issues and facts of the case, in a post that is worth the time of those who would like to gain insight into the world of stock underwriting.

A Facebook Underwriter's Confession

"Before I'd put retirees in 'em,
I've got to confess my unease in 'em;
The shares would be splendid
If they were still friended
In one or two months, just to season 'em."

Facebook has finally priced its IPO at $38 a share, valuing the social networking company at $104 billion. The global frenzy for $FB was so great in the weeks leading up to the initial pricing that US demand alone would have bought 30 times the 421 million shares on offer. Under such circumstances, a double-digit "pop" in the price is to be expected on the first day of trading, and those who did not count themselves among the fortunate few to receive allocations of IPO shares had better wait for the hysteria to die down before "liking" Facebook stock with their retirement savings.

Mr. Blankfein's Politics

"There's belief among Washington's polity
That Wall Street's Republican - solidly,
As we bankers assent
To the GOP bent
To fight against income equality."

"But on social concerns, it appears,
We set such belief on its ears,
In our scorn for the fringe
That would tend to impinge
On the rights of our gay Muppeteers."

According to Bloomberg.com, Goldman Sachs CEO Lloyd Blankfein's gay-rights stance "shows Wall Street's dilemma": whereas the financial titans might like Republicans to regulate banking and labor unions, they'd prefer the Democrats on contraception and marital unions. Mr. Blankfein took part in the "Out on the Street" LGBT Leadership Conference on Tuesday at Bank of America's New York office. As he noted in his earlier, robust endorsement of marriage equality in New York (see the video below), Mr. Blankfein believes that such policies are "just good business," facilitating the recruitment and retention of talent around the world. On the other side, the North Carolina legislature is considering a constitutional ban on same-sex marriage, which Bank of America expects will make it yet harder to attract employees to its Charlotte headquarters.

Cruelty to Muppets

Said a Goldmanite, freaking his guys out:
"How my conscience courageously cries out!
Though I trusted this firm, it
Exploited poor Kermit,
Rapaciously ripping his eyes out."

The New York Times set Wall Street ablaze today with its publication of Why I Am Leaving Goldman, a banker's bitter swan song to a financial culture gone astray. Greg Smith, the suddenly former head of equity derivatives in the firm's London office, made an earnest confession (perhaps too earnest) of what everyone else has said for years: Goldman, Sachs makes money by ripping off its clients. Inside the firm, clients are disparaged as "muppets" who deserved to get their "eyes ripped out" (sorry, Kermit). But, aside from the insertion of non-disparagement clauses in the Vampire Squid's employment contracts, what will change as a result of this cri de coeur? Maybe nothing, but it does provide a moment of clarity for reflection: conservative blogger Noah Millman, a former equity derivatives man himself, explains the money behind Goldman's changing ethos -

It takes discipline to say, “let’s take care of the customer, and think of the long term” when you’re talking about normal amounts of money. When the amounts of money become as staggering as they were in the mid-2000s, the game – at best – becomes “how can we convince ourselves that we’re taking care of the customer.” Because what if the only way to take care of the customer is to get out of the game?

However, the final word should go to Marketplace's Heidi Moore, who looks into the soul of Wall Street and asks:

Did Goldman change the way it did business? Maybe. But the more likely view is that those flaws - in the industry, in the firm, in other firms - have been there for a long time and the scales just fell from his eyes when it finally turned against him.

An Allegedly Well-Placed Tipper

A Goldman director named Gupta
Was looked upta but turned out corrupta;
He tipped from inside,
Said the Feds, who then tried
To disrupt that which Gupta was upta.

Federal prosecutors have indicted Goldman Sachs director Rajat Gupta on charges of engaging in an insider trading scheme with hedge fund manager Raj Rajaratnam, who has already been convicted. In a novel twist, the prosecution acknowledges that Mr. Gupta did not directly profit from the tips he provided on Goldman Sachs and P&G (of which he is also a director); rather, Mr. Gupta's motivation was seen to be the cultivation of influence and favor with his far richer friend, with whom he also invested. For his part, Mr. Gupta found it serendipitous that his indictment coincided with Diwali, the Indian "Festival of Lights" and start of the new year, as he felt that this would offer a measure of divine protection.
Regardless of the outcome of this case, may all those kindling the festival lights have a Happy Diwali and a prosperous New Year!

Too Big to Save?

Those banks that were too big to founder
Have grown bigger without growing sounder;
So, what to do then,
If they founder again,
As sooner or later they're bound ter?  

The top five US banks now comprise 13.3% of the nation's financial firms' assets, as Real Time Economics points out in its Number of the Week. This is up from 11.8% in 2007, when Bank of America, JP Morgan Chase, Citi, Wells Fargo and Goldman Sachs were all considered too big to fail. In a comment echoed by MIT economist Simon Johnson, RTE's Mark Whitehouse wonders if these banks, in comparison with the federal government's strapped resources, are now too big to save.

Perfect Game

Wall Street's "too big to fail" titans
Had a quarter so good that it frightens;
On the trading parquet,  
They made money each day -
Is it rigged? Incredulity heightens...

One Bad Apple, or a Rotten Bunch?

There's a time-honored CDO dictum,
When a firm's charged with fleecing a victim:
Every other firm too
Will conduct a review
Of the tranches it sold, and who picked 'em.

The Goldman-Paulson Case: Pro & Con

Institutional buyers of debt
Are big boys and deserve what they get,
But if some of those boys
Knew who cobbled their toys,
They may not have invested, peut-être?

Overheard at the Desk of "Fabulous Fab"

"This CDO's fit, if you please,
For a carry trade like IKB's,
With a mortgage portfolio
Hand-picked, as I told you,
By investors with deep expertise."

Abacus 2007-AC1

Said John Paulson, "Subprime will tank,
And I'd like to take that to the bank."
Said Goldman, "We'll fashion
A short you can cash in
From the Kool-Aid our dumb clients drank."

A Derivative Argument

Goldman and Morgan disputed
That derivatives must be concluded
Via centralized clearing:
"Our return's disappearing 
If this bank reform bill's not diluted."

Overheard at Goldman Sachs

"We assume that you know what you're doing,
In this ill-advised trade you're pursuing,
But the opposite bet
That we place on your debt
May eventually hasten your ruin."