Troubling signs that emerged days before the IPO were hidden from the public by Wall Street, according to an article in The Motley Fool by Eric Bleeker entitled "The Tragedy of Facebook: How Wall Street Robbed Main Street." While Wall Street helped Facebook promote its IPO, and brought it public at a falsely elevated price, analysts at the underwriter firms cut their earnings estimates for Facebook. That was unprecedented for an IPO. But it was only disclosed to a few favored clients, while the rest, who were encouraged to buy Facebook stock in the IPO, were kept in the dark. The banks' analysts apparently didn't even cut their estimates based on their own due diligence. A Facebook executive had to tell them they should cut their estimates, according to the article.
After Facebook shares popped up, and then quickly began to sink, while Morgan Stanley, the lead underwriter, was buying shares to try to temporarily prop up the price, underwriters Goldman Sachs and JPMorgan were lending out Facebook shares to be sold short by the few institutional clients who had been tipped off about Facebook's lowered earnings estimates, further exacerbating the slide. So much for Wall Street's claim that it can manage its conflicts of interest while millions of dollars are in play.
Morgan Stanley's buying of Facebook shares did not result in a loss for Morgan Stanley. It sold more shares into the IPO than it bought, and therefore made a profit even though Facebook shares plummeted. Indeed the Wall Street underwriters made $100 million from trading Facebook as retail investors lost $630 million and counting. Thus Wall Street wins even if investors lose because the game is rigged against the investors and in favor of Wall Street.
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