Friday's Facebook (FB) IPO was an example of why we need to maintain separate and unequal classes of people in the United States.
Before you get too riled up, this is not a David Duke-like or skinhead rant for separation of races or any such drivel. Neither is it a Shockley-like pseudo-intellectual rationalization for why one race is superior to another. My own family suffered greatly at the hands of those that had such deeply held beliefs. It is totally abhorrent and beyond me how anyone could believe that one group of people is any less deserving or is in any way less inherently capable than another group.
Instead, my belief that the need to banish equality in access to wealth creation tools is an understanding that differences are what make the system function to benefit us all and those differences need to be maintained.
My wife is enamored of all things that stem from India. The people, the food, the culture and everything else that she chooses to include in her assessment. She likely doesn't think too much about the distinction on the bases of class and caste, because that would make the idyllic vision less appealing, particularly to Western eyes that may not appreciate the long held religious beliefs that contribute to a far away society's views.
She also chooses to not see the immense poverty and the maldistribution of wealth that is, to a degree, tied to a cultural and religious outlook on divine entitlement.
I'm of the belief that all people are and should be equal by whatever set of eyes are observing.
However, I also truly believe that if there was an equal distribution of wealth it wouldn't take very long for a new class of wealthy individuals to arise among the population, just as it wouldn't take terribly long for paupers to appear on the scene. Not that every asset draining event in life is within an individual's control, but somewhere along the line people do distinguish themselves by what they are able to contribute to the maintenance of society and themselves.
Where does Facebook fit into all of this? Like Twitter and all things in the new age of social media, it is a great equalizer, allowing people of all walks in life to become "friends" or mutual "followers." Of course, in the case of Facebook, an individual may choose to act as a gatekeeper and have a means test, yet so many barriers can be broken down allowing people from all walks of life to interact. Twitter, for example is truly egalitarian, as it takes extra steps to create privacy or to block specific individuals from interacting with you. In that world it is really possible to be an equal among equals. We revel in this and certainly that fuels the popularity of social media, especially since we know that in real world of our society some people are more equal than others.
The world of IPOs, though, is not really an egalitarian world, at least not when it comes to the cream of the crop companies.
Years ago when I was investing with a traditional retail brokerage firm, I would receive opportunities to participate in hot IPOs. Not many shares, mind you, but enough to make me feel appreciated and more importantly enough to make their sale a profitable venture.
I'm not a terribly big fan of national trickle down philosophy or tax policy, but I have no doubt in my own case, that the realization of profit from the frenzied bidding up of such shares as "Boston Chicken" did end up supplying some benefit to society, charities, the arts and some benefit to federal and state tax receipts. I was personally responsible for an orderly transfer of wealth as a result of my good fortune.
When I moved to a discount brokerage firm after the death of my broker, the IPO offers ceased. Not entirely, but only for the companies that were likely to have share appreciation upon their release to the general public.
Instead, the kind of companies that were offering IPO shares to discount brokerage companies tended to be the kind that no sane person would want to acknowledge. There weren't many good rules of thumb in the world, but one was to stay away from IPO offers from E*Trade (ETFC).
With very few exceptions, the hot IPO has a very distinctive pattern. That pattern is of frenzied trading and seemingly irrational bidding up of share price once that first ceremonial trade is made.
That pattern has recently been accentuated by the most recent strategy of releasing only a sliver of shares to the market, thereby creating an immediate supply/demand disequilibrium.
Those that received share allocations in the hot IPOs were among those most equal among equals, meaning that they had more wealth, more influence and more high profile visibility than most people. Of course, even among the most elite of our society allocations were limited because the corporate beast had to be fed, as well. Mutual funds, hedge funds and other creators or destroyers of great wealth were truly first among equals.
In such a world it is the disenfranchised that want to be part of what is perceived to be the wealth creation mechanism, as personified by the ownership and subsequent sale of shares in a popular IPO.
When the shares begin trading, the disenfranchised exercise an adrenaline rush that is reminiscent of that normally reserved for the "fight or flight" mechanism when one is faced with impending danger. The mad rush to be part of the over-class adds to the disequilibrium in supply and demand and propels the price of that rare commodity upward, at which point the over-class decides to sell their shares, thereby creating their profits and once again separating themselves from their new equals, by virtue of relinquishing for sale their common base.
But what's so wrong about concentrating the wealth created by an irrational price movement in the hands of a chosen few? Let's go back to the trickle down phenomenon. There is no doubt that marginal wealth accumulation is distributed among the various cogs of the economy by those fortunate enough to accumulate that wealth.
With great profits come great responsibility to spend those profits.
New homes, new cars, new jewelry and, of course, more taxes for federal and state coffers. Profits also get re-invested, as money does beget money.
In turn, those that end up being saddled with an over-valued stock, as a result of an irrational bidding process, are left with a decision. Sit on paper losses, wait for the shares to recover or take the loss.
Of course, taking the loss has a price with regard to tax receipts, but much less so than the positive impact provided by those that realized profits, owing to a likely differential in tax rates between the two groups of investors.
So Facebook and its main underwriter, Morgan Stanley (MS) decided relatively late into the process to expand the offering and make shares available to retail customers and through discount brokers, as well. On the surface, that seemed like a very nice thing to have done. Truly the kind of touch that many had urged Zuckerberg to consider. In fact, charities were clamoring and imploring for their own carve out allocations, so that they could share in the process of generating profits, without consideration of the possibility that there might not be profits to be had.
But how could all of this be done. How could everyone be made happy? as usual, when you want to make everyone happy, no one really ends up being satisfied. Add to that a little bit of good old fashioned greed and both the upper price range and the supply of shares were increased by 8% and 25%, respectively.
All of a sudden, those that would ordinarily be fueling the wild bidding process of the IPO, looking to join the club at any price, were transformed from buyers to flipper wannabes. They got what they wanted. Entry into the club.
Instead of buying, the retail customer was thinking of nothing but selling. After all, isn't that how the original club members do it?
The disequilibrium that usually existed for an IPO was disrupted. With a deficit of buyers and a new population of enfranchised sellers. How would the prophecy of great riches be answered if you begin the process by violating an inviolable rule of economics?
As shares of Facebook closed with less than a 1% gain, think of all of the lost tax receipts, as the great gains envisioned were never realized. Think of the intangible cost of not fueling investor confidence that could have spilled over to other stocks. In fact, quite the opposite occurred, as even the most credible of recent hot IPO issues, LinkedIn (LNKD) plummeted, as did shares of its lesser regarded brethren Groupon (GRPN) and Zynga (ZNGA).
To further compound the calamity, there are reports that the lead underwriter, Morgan Stanley, had to purchase shares in the open market, in an attempt to keep the price from falling below the $38 offering price. It is said that they committed $2 billion to that effort. Unless Facebook shares show some quick upward promise, that commitment will be very short lasting, with detriment bought to Facebook, its shareholders and to Morgan Stanley and its shareholders. The great gains that were envisioned and the subsequent discretionary spending and increased tax receipts will not materialize.
And of course, there are the potentially dashed dreams of those companies with IPOs on the drawing board. If they had thought that Facebook was opening the window for them, right now that open window may only serve the purpose of making it easier to jump.
Finally, there always has to be conspiracy theorists out there who believe that the decision to open up the process was an attempt to saddle those that had already been trampled by the over-class, with a losing and ego-deflating position. Upset to have been initially excluded from participation, but now finding cause to be upset that they were included.
My father always used to say that money brings out the best in people and the worst in people. A corollary to that is that it also brings out the irrational component of their thought processes.
And what is to blame for all of this? That's right, the poorly conceived notion that equality and equal access was the right thing to do. Well, it may be conceptually right, but it may still not have been the right thing to do.
I hope Wall Street comes back to its senses and we all realize that there is a natural order of things. Jealousy is a terrible thing and literally has cheapened us all.
