What Flops at J.P. Morgan and Facebook have in Common!
J.P Morgan is stunned by a speculative investment gone badly to the tune of $2.5 billion, which may increase to $4 billion. Facebook trading will open today with investors having to subtract at least $15 billion from the IPO that priced its value at $100 billion.
What the two have in common are speculators whose big appetites for quick profits have resulted in disappointing losses.
If Wall Street thought it was difficult to gain the confidence of retail investors and get them back into the market following the financial meltdown and the Great Recession, try doing so now.
Consumers’ faiths in the integrity and common sense of investors have taken another one-two punch and that confidence may not recover for a very long time.
The public was fairly confident that it would not hear discussions about banks investing depositors’ money into credit default swaps, as happened during the real estate bubble. The public was wrong! J.P. Morgan behaved just as other banks did prior to the financial meltdown. They took commercial deposits that consumers assumed would be invested in low risk instruments and put them into a speculative bucket.
Given recent history, the outcome should have been predictable.
David Weidner’s Market Watch commentary calls Facebook an “embarrassment” and captures the essence of what went wrong. “After six weeks of escalating warnings about valuation, profit, revenue, and strategy, Facebook did to Wall Street what it’s been doing to those of us foolish enough to use its product: it pantsed us.” He goes on to note that even those who didn’t buy Facebook directly will likely feel the effects in their 401(k)s because their mutual fund manager bought it on their behalf.
One difference between Facebook and J.P. Morgan is that the management of Facebook, the company insiders and its financial backers came out on top. They sold when the shares peaked, and before it plunged in value by at least 15%, based on advance signals of today’s market opening. Management was able to achieve its wealth by artificially pricing the stock, out of alignment with conditions of supply and demand.
America is suffering from a speculative appetite gone out-of-control. To Wall Street investors and to the pending congressional hearing the question is, how did these things happen? To the ordinary person on the street the question is, why did it happen?
The great thing about the.com era was that it ushered in a revolutionary new technology, the Internet. The bad thing about the.com era was that the pervasive psychology of many would-be leaders of the new revolution was to get rich quick. So they manufactured IPOs based on zero earnings and undefined revenue models. That strategy was simply to get large numbers of visitors coming to the website and then sell the business to the nearest sucker.
Often, the wealth creating process that took place during the Internet bubble and the housing bubble was based on schemes designed to reshuffle wealth from one hand to the other, as opposed to business models rooted in creating new productive value. Sometimes those schemes worked, frequently they did not.
We still haven’t learned the lessons of the Internet bubble, housing bubble or great recession. Therefore we shall continue to indulge these superficial and speculative approaches to creating wealth while our major global competitors march toward economic superiority. They will gain that status by working harder, smarter and by creating real productive value, not by creating technical algorithms reshuffling wealth.