ipo Archives - Bankers Anonymous

August 24, 2021August 24, 2021

Breaking My Own Rules To Teach My Kid

NOTE: I wrote this back in March 2021, the week that Roblox did its direct listing. A version of the post ran in the San Antonio Express-News.

To research the hottest new tech stock, Roblox, I went straight to my highly plugged-in in-house analyst: my eleven year-old daughter. She sat me down on the couch with her iPad and patiently explained to me the user-generated games, the in-app purchases, and the revenues available to both gamers and creators on this gaming platform. After that, we arranged for a $50 investment of her money¹ in shares on the first day they became available, Wednesday March 10th.

Roblox listed 199 millions shares on the New York Stock Exchange last week² but did it in a most unusual way: a direct listing, rather than an IPO.

There are at least two innovative things to know about this. One is about the company and the other is about this direct issuance, which I suspect we’ll see a lot more of in the future.

Most companies that list shares on stock exchanges first do an initial public offering (an IPO). An IPO involves investment bankers preparing a “road show” and a consulted negotiation around the issuance price that all new investors will pay. A company doing an IPO typically seeks to both raise new money for the business and to allow private investors to sell some of their stakes in the business.

A direct listing, by contrast, raises no new money for the company. It merely allows privately-held stakes to be floated on an exchange – The New York Stock Exchange in the case of Roblox – to allow insiders a chance to cash out and outsiders a chance to buy in.

Roblox didn’t need new money, in part because it secured $850 million in private financing in January of this year, solving the fundraising part of an IPO ahead of time. Roblox had already ended 2020 with close to a billion dollars on hand, further explaining why it skipped the fundraising part of an IPO. It also saw fourth quarter revenues jump 111 percent from 2019 to 2020, providing the kind of growth tech investors crave. Roblox had cash, name recognition, and buzzy growth, so the road show and fundraising parts of going public were unnecessary.

Until now, direct listings have been extremely rare. Spotify – the audio-streaming company founded in Sweden – is the highest-profile direct listing ever done previously, back in 2018. By direct listing rather than hiring a traditional Wall Street underwriter, a company can in theory save huge bucks, which typically runs between 3 and 7 percent of the money raised. A direct listing not only forgoes the support of a new issuance, it skips the marketing hype that accompanies a traditional roadshow. In the case of Spotify as well as Roblox, they didn’t need the marketing hype. Among their customers and within their own industry, they are dominant providers. And by all appearances, the shares didn’t do worse as a result of a direct listing rather than a traditional underwriting process. Roblox soared 54 percent from its initial listing price on the first day.

This direct listing method is all pretty new stuff.

The New York Stock Exchange moved in the direction of allowing more direct listings through a request to the SEC in 2019. In December 2020, the Securities and Exchange Commission approved direct listings (under certain conditions). The Roblox listing last week is the first high profile test of this way companies can reduce their Wall Street fees and, given its success, we should expect more companies going public to choose this route in the future.

Meanwhile, Roblox itself is innovating in other ways. For better and worse, they have mastered the art of capturing kids’ attention with their immersive-world game platform.

For the past year and a half – during COVID isolation from school and ordinary interactions with other humans – Roblox has occupied more of my daughter’s time than any other single activity, except maybe sleeping. Even the sleeping part is arguable when lined up next to Roblox time.

You may be curious, what does she do on Roblox? It’s virtual-reality games. Her favorite game, “Adopt Me,” is about adopting a pet. And then upgrading that pet into the most stylish and unique pet possible. Her latest acquisition last week, a golden unicorn via a hard-earned golden egg, was incredibly exciting, apparently. You had to be there. Other games within the virtual reality involve heists, escaping burning buildings, or avoiding a killer. Normal stuff kids are into, I guess.

The Roblox company, as a games platform, facilitates user-generated content, meaning gamers can invent their own games. For that, designers receive either virtual dollars or real dollars. In real dollar terms, over a thousand game designers have earned more than ten thousand dollars in the past year on the Roblox platform. That may not support a family, but to an eleven year old that amount of money seems incredibly enticing.

Through the course of this column, I have described breaking at least three of Mike’s Cardinal Rules of Investing, so I briefly just want to acknowledge these and then explain my rule transgressions.

First, I don’t recommend you buy individual stocks. For kids, however, I do think purchasing individual stocks is useful for teaching and learning purposes. Individual stocks for companies they know can get them excited about the magic of investing, capitalism, markets, and compound interest. It’s just too darn boring and abstract to explain low-cost diversified index funds to an eleven year-old, even though that is how all of us should always invest.

Second, I never write about individual stocks I own (or that my family owns) because I don’t generally own any and also I don’t want even the appearance of a conflict of interest between my writing and my family finances. So I broke that rule also today. To which, in my defense, I can only plead with you to believe that I have not sold my journalistic soul to shill and pump up my eleven year-old’s $50 stock investment. To be clear, in no way do I recommend Roblox shares for any of you. This thing is probably going to zero. Which would be a great educational outcome for her! She might cry, but I would be happy, because $50 is a very cheap lifelong lesson from Daddy on the risks of owning individual stocks!

Finally, I always recommend against buying new listings – traditionally IPOs – for a variety of prudent reasons having to do with information disadvantages, media hype, and the greedy exuberance of insiders selling to a credulous group of outsiders. Please excuse my rule transgressions today, they were each done with an educational purpose.

Please see related post:

My review of M1 Finance

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If you’re wondering how to invest just $50 in shares that each cost $65 on the first day of trading, the technical answer is the investing app known as M1 Finance, which allows for fractional ownership of shares and about which I wrote a thing here in December 2018. ↩
Again, not exactly last week, but in March 2021. ↩

January 16, 2020June 14, 2023

The Saudi Aramco IPO Headscratcher

The world’s most profitable company listed its first public shares in the first week of December – in the largest IPO of all time – and you didn’t get your chance to buy? Don’t worry, be happy. May I offer you a much better idea?

The Saudi Aramco pre-IPO price guidance tells us at least one of three things. Either:

The Saudi Aramco IPO is way overpriced. Or,
US energy stocks are way underpriced. Or,
Both of these things are true at the same time.

If we check out the S&P 500 Energy Index (ticker symbol SPN) , made up of the 28 largest US-listed companies, they make a nice comparison with the Aramco listing. I’ll start with the math comparison, and later move on to comparing governance.

Aramco sold 1.5% of itself and priced at the IPO in December as initially worth $1.7 trillion.¹ The 28 US-based companies in the SPN are currently valued by public markets, if you add them all up, at 1.1 trillion. In other words, they are valued at 35% less than where Aramco launched.

Aramco produced annual profits of just over $111 billion in 2018. Meanwhile, the SPN companies produce annual profits, if you add them all up, of $291 billion. In other words 262% more in annual profit for US energy companies than Aramco. I don’t know. 2.62 times the annual profit at 65% of the price? That’s my dumb, but also pretty good way, to look at it.

I suppose you could get into proven oil and gas reserves and more complicated analysis here on the future profitability of exploration and production companies, but I like simple, so thanks for indulging me on my simple analysis.

What other way can we understand the relative performance and value of US energy stocks? Here’s one. While the US S&P 500 Index representing all 500 of the largest US-based stocks soared 178% between 2009 and 2018, the S&P E&P Index representing the largest oil and gas companies shrunk 2% overall.

Also, the US energy sector market value, as a percentage of the S&P 500, has hit an all-time low in 2019. So investors are merely modestly valuing US-based energy companies, and valuing them relatively less than they ever have. Just interesting to note.

I think markets are rarely wrong in the long run, so what explains this US energy sector versus Aramco anomaly? In the case of Aramco at least, it’s worth remembering the stock market did not actually drived the IPO price here.

ARAMCO History

Let’s briefly recap the history of the Saudi Aramco IPO. This is Saudi Arabia’s state-owned oil company, formed after the Kingdom nationalized holdings from oil giants Exxon, Texaco and Mobile between 1973 and 1976. Aramco has been sovereign-owned since then. The current leadership of the country, Crown Prince Mohammad Bin Salman al Saud (known as ‘MbS’ to the kool kids) believes that:

1. They have the world’s single most profitable company, and

2. MbS has long thought that they could sell some of the world’s most profitable company on the global stock market, they could use the proceeds to diversify into other industries and technologies.

This makes perfect logical economic development sense for the long term prospects of the Saudi Kingdom.

The problem for the past few months, however, is that MbS wanted a $2 trillion valuation for Aramco, while large global investors gave pre-IPO feedback to Aramco’s bankers that they would value the company around $1.2 to 1.5 trillion.

Saudi Aramco’s backup plan, therefore, was to reject the international feedback, and to instead sell shares to mostly Saudi investors on the Saudi stock exchange, at a valuation of $1.7 trillion. Since they planned to sell only 1.5 percent of the company, that would – simple math tells me – raise around $25 billion.

The great thing about selling only to Saudi investors is that MbS as recently as October 2017 locked many of them and their relatives in the Ritz Carlton hotel, Riyadh for up to three months, essentially as hostages, until they coughed up money to the Kingdom, reportedly netting around $106 billion. This was described by MbS’s government as an anti-corruption campaign at the time (and who’s to say, maybe some of them are corrupt?) but there’s only the subtlest distinction between what actually happened and what a mafia shakedown would look like, if conducted entirely at the Ritz Carlton, Riyadh. MbS is also widely believed to have ordered the murder and dismemberment of Washington Post columnist Jamal Khasshogi and other dissidents, a point also surely not lost on local wealthy investors.So we’re not exactly getting, let’s say, efficient market pricing feedback from local Saudi investors here.

This listing on the Saudi exchange highlights Aramco two biggest problems – vulnerability to shocks, and governance.

US-Based Advantages

The US-based market for energy companies has the advantage of being highly competitive and diversified. This makes it flexible to respond if bad things happen.

What do I mean by “flexible,” and “bad things?”

For example, drone attacks lobbed in by Yemeni (Iranian-backed) forces shut down for some time half of the productive capacity of Saudi Aramco back in September.

It is hard to imagine a few drone attacks stopping or slowing the productive capacity of 28 different companies that make up the entire S&P500 Energy sector.²

Another huge advantage of the US-based energy sector is governance. Not to put too fine a point on it, but the CEOs of Exxon and Chevron don’t typically gather up all the wealthy folks in the world and lock them in a hotel like hostages until they pledge to do the company’s bidding. Say what you will about them, but the US energy sector corporate leadership is considerably less stabby than MbS. For that reason alone, US energy companies should be valued by investors well above Saudi’s Aramco.

To keep local Saudi investors in line and prevent them from doing the rational thing – like selling Aramco shares and buying much more attractive alternatives like US energy companies – the local Saudi investors’ shares will be ‘locked up’ for a year after the IPO, restricted from selling.

Capitalism is really great, except when it combines with command-economy authoritarian tactics that lock up investor’s money – or investors themselves – for long periods of time.

A version of this post ran in the San Antonio Express News and Houston Chronicle (a bit before the December IPO.)

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for a brief minute the company has been worth $2 trillion, but only briefly ↩
But don’t get any big ideas, Greenpeace! ↩

November 10, 2017

IPOs For The Everyman

In August I received an invitation by mail – complete with an offering prospectus and stock order sheet – to subscribe for shares in the initial public offering (IPO) of Ponce de Leon Bank, a Bronx, NY-based savings institution where I have a CD.

I’ll admit upfront I barely know anything about Ponce de Leon Bank. I walked into a bank branch in northern Manhattan in 2002, specifically hoping that one day I’d be invited to participate in their IPO. My plan worked, a mere 15 years later.

In September I put in my order for PDLB at $10 per share.

The stock opened at $14.90 on October 2^nd. Go me!

I don’t want you to think I normally get invited to participate in IPOs, which are generally reserved for institutions and extremely high net-worth people. Like, normally if you don’t have $100 million with a brokerage firm, it’s not worth asking about getting into the offering. The key to participating in this IPO is that I am a depositor, and Ponce de Leon Bank was a “mutual bank.”

Of the estimated 5,787 FDIC-insured banks in the United States an estimated 577 of them are mutually-owned banks , which means they were not founded by private or public investors, but rather by depositors.

That means that when the bank management of a mutually-owned bank decides to go public – as quite a few banks decide to do each decade – the first people in line with rights to buy shares are its depositors. Like me. Also interestingly, although I opened just a $1,000 CD at Ponce de Leon Bank back in 2002, the offering prospectus gave me (and every depositor) the right to order up to $300,000 worth of shares. I didn’t, but the cool possibility is that I might have. A boy can dream, right?

Normally I’m opposed to even attempting to participate in IPOs, since the information-disadvantage between buyer and seller is too great. What I mean by that is that when startup owners and private equity owners of companies decide to sell shares in an IPO, they generally know far more about the business than do the purchasers of shares. Since the insiders are selling – the very definition of an IPO – it seems illogical to be overly excited as an outsider to buy. Even Warren Buffett agrees with me. Ok, more like I agree with him, when he wrote that “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less knowledgeable buyer (investors.)

But at least in this respect mutual bank IPOs are different. There is no “insider-owner” who decides to sell shares, since the owners are the depositors of the bank. The management of the bank – the board, president and key executives – is a kind of insider-group, but they also generally line up to purchase shares in a mutual bank IPO. They are certainly not selling. They can’t, since they are not owners.

As always, investing involves risk, and buying shares in a bank I don’t know anything about isn’t something I’d normally recommend. And yet, mutual bank IPOs that I’ve participated in since 2002 have a positive track record overall.

Third Federal Savings and Loan (renamed TFS Financial Corporation, TSFL) popped from $10 to 11.8 on its the first day in April 2007.

North East Community Bank (renamed Northeast Community Bancorp, NECB) traded to 11.25 on the first day in July 2006.

Atlas Bank, purchased by Kearny Financial (KRNY) ended its offering on the first day 10.9 in 2015.

I managed to lose money on Sound Community Bank (SNFL) in January 2008 and Cape Bank of New Jersey (CBNJ) in March 2008. I explain those anomalies as “everything risky lost money in 2008.” Those IPOs both opened below $10 per share, and I sold shares in both at a loss.

There have been a half-dozen others I’ve participated in since 2002, all up something after the IPO except for those two in 2008.

As with all investing opportunities that diverge from my 6-word investing mantra – Buy equity index funds! Never sell! – I’m not saying you should necessarily do this. There’s a real hassle factor involved in this mutual bank IPO hack. Bank statements and privacy notices fill up my post office box throughout the year. My accountant thinks I’m bizarre, collecting and reporting tiny amounts of interest from numerous banks. If I keeled over and died tomorrow, would my wife be willing or able to track down the 31 different CDs and savings accounts I have at mutual banks scattered around the country?

For the record, I own none of these shares now, nor do I own any individual stocks in my portfolio for that matter. With mutual bank IPOs, I generally sell at the earliest possible moment because, like I said, I don’t know anything about these banks.

Please see related posts:

Facebook IPO

Twitter IPO

How To Invest – Keep It Simple

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November 6, 2013

What Should I Think About The Twitter IPO?

What should I think about the Twitter IPO?

Mostly you should think about Las Vegas, Nevada, as a number of important analogies apply here.[1]

First – The Poker Table

You know the rule that if you’re sitting at the poker table, and you’re not sure who the sucker is, then it must be you?

That’s you, the retail buyer, in any IPO.

Why do I say that? How do I know that?

Buying an IPO as a retail investor - You do not have pocket Aces — Buying an IPO as a retail investor – You do not have pocket Aces

The people who have the most information about Twitter are the insiders in the business. They are the founders and the earliest private equity investors, and they know this business inside and out. They have lived and breathed this company since its existence. You have not.

The next most knowledgeable people are the bankers and financiers, who evaluate newish companies, in emerging industries, with swiftly changing technologies, and uncertain cashflows, for a living. They live and breathe stories and companies like Twitter, which you do not.

Now, at the poker table, the insiders and the bankers know their own cards, and they also know your cards, as well as the next few cards coming up on the flop, the turn, and the river. Nine out of the ten folks at the table in this transaction know more than you do. Interestingly, they are extraordinary friendly and welcoming of you at their poker table.

You should not be thinking “Huh, this Twitter IPO looks like an Ace – Seven off-suit. If I can hit another Ace as a table card, I might do pretty well at this table with these so-called pros. That would be sweet!”

No. Instead, you should be thinking: ”My what big eyes they have,” and “My, what large teeth they have.”

Remember this: The insiders – the most knowledgeable people – with the help of their bankers – the next most knowledgeable people – are all selling their ownership in this company. They are indicating, in the clearest terms possible, that they believe the company is more valuable right now than it will be in the near future.[2]

Do you doubt this? If the insiders believed – on a probabilistic basis – that the company will be worth significantly more 1 to 5 years from now, they would not be selling their ownership. They would wait for it to become more valuable. These are all rational, smart, people.

You, on the other hand, are the easy mark. Have a seat. Come play poker with me.

Second – Extraordinary Payouts

“But,” you are quick to think, “I’m pretty sure from watching TV that there’s a lot of money being made somewhere in this IPO. Isn’t that what it’s all about?”

Yes, this is true.

State lotteries display big winners in their advertisements, and at press conferences. Casinos make sure to tout all the big jackpots their customers have made in slots, or poker tournaments, or on their easy roulette wheels and craps table.

Everybody loves those goofy oversized checks

And those winners are real people, with real payouts.

But that is not your role, as a retail investor, in an IPO. You do not get that goofy oversized check.

The people with the big payouts from the Twitter IPO are the insiders, the founders, the executives, and the early private equity backers of Twitter. The IPO represents a giant payout for them.

The massive payouts to insiders give the Financial Infotainment Industrial Complex the equivalent of that goofy oversized check to breathlessly illustrate a big transaction like Twitter’s IPO.

Remember, that payout is real, but it’s not for you.

Third – The Flashing Lights, Whistles and Bells

If you have walked the floor of any casino, the flashing lights and whistles and beeping buffeted you. These sounds and lights provide an untrustworthy signal that “Wow, somebody is making money here!”

The Financial Infotainment Industrial Complex goes into high gear with an IPO like Twitter’s to provide the flashing lights and beeping and sound of coins dropping incessantly.

Their goal – as always in all of this – is to capture newsstand sales, Nielson ratings, page views, and click-throughs, with emotionally gripping, eye-catching, events.[3] The Twitter IPO provides just such an event.

A flashy score for a small group of entrepreneurs and investors is that opportunity for the clink-clank-clink-clink of Triple Cherries, just as you slip past, flushed with heightened oxygen levels, trying to navigate the purposefully crooked casino floor, on your way to the restroom.

This is not how to think about an IPO outcome for you

In sum, try to buy a piece of the casino, but do not gamble

Unless you are an insider in some way to the Twitterverse, you have no business participating in the Twitter IPO, or practically any IPO for that matter.

Don’t get me wrong: Investing in public companies – with a long time horizon – is a fabulous opportunity. I even took all of my 8 year-old daughter’s savings and invested them in the stock market to teach her about this opportunity.

To extend the casino analogy even further, long-term stock ownership is like owning a piece of the casino. You may have short-term ups and downs, but in the long run the odds will work out in your favor because you have house-odds, and you will build wealth, almost inevitably.

And also, please don’t get me wrong about Twitter. I’m agnostic about Twitter as an investment opportunity. I would describe every other highly-discussed IPO similarly.[4] I assume mutual funds that I own will end up purchasing some Twitter shares, and I’m perfectly fine with that, over the long run, and in a diversified portfolio.

I love public stock ownership, and I’m happy for the few folks for whom this Twitter IPO will be a meaningful event.

But the point here is that Twitter’s IPO is, and should be, entirely irrelevant to the rest of us and our financial lives. But the casino makes it hard for us to ignore it as we should.

[1] Really, this applies to any IPO. I don’t mean to pick on Twitter, except I’m fairly sick of hearing about it and its IPO should be totally irrelevant to all but a few dozen people on this planet.

[2] Warren Buffett on IPOs “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

[3] If you have not walked the floor of a casino because you prefer to stay home and knit tea cozies, that’s cool. I admire you. Let me give you another analogy for the relationship between us and the Financial Infotainment Industrial Complex. We are the kittens. They hold the ball of string.

[4] The last high profile IPO I wrote about, Facebook, I got to combine a favorite Wall Street phrase with a favorite classic rock lyric. And I was just as jaded about IPOs.

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October 30, 2013October 30, 2013

If You’d Like To Understand Financial Instruments But Need A Sports Hook

If you’d like to understand financial instruments used on Wall Street better, but you need a sports or entertainment hook as a spoonful of sugar to make the medicine go down, I recommend this article by Katie Baker on Grantland about the proposed Arian Foster “IPO” deal.

[Katie Baker – who I do not know personally – is a hero to me, as she quit her analyst job at Goldman, Sachs a few years ago to become a sports writer (on the hockey beat) for the Bill Simmons/ESPN-sponsored online startup Grantland. The site combines Simmons’ patented sports-plus-hollywood formula with other great writers such as Chuck Closterman, Charles Prince, and Malcolm Gladwell. Grantland makes traditional newspaper sports sections groan-worthy yawn-fests by comparison.]

The Houston Texans’ Pro-Bowl running back Foster announced that a company named Fantex seeks to raise $10 million for him this year, in exchange for a 20% cut of his future football earnings. The “IPO” seems to offer investors a chance to move their fandom relationship with individual players beyond fantasy football, and into an actual investment in the long-term financial success of those individual players. The “IPO” offers the kind of risk profile – as well as upside – of investing in a startup company.

In the article and accompanying sidebar Baker explains some of the myriad details of this new opportunity (e.g. it’s targeted to unsophisticated investors, it’s an entrepreneurial idea that Fantex hopes to reproduce with other athletes, Foster recently tweaked his hamstring, Foster’s future earnings from his children’s book are not included!).

She also makes clear this Foster IPO has plenty of risks, but that it does resemble an innovative risky investment in the upside potential of a star athlete.

Test case of the JOBS Act

Interestingly, to me, the Fantex offering relies on the new “Jumpstart Our Business Startups (JOBS Act),” meant to lower barriers to unsophisticated (less wealthy) investors to participate in risky start-up financing. Passed by Congress in early 2013, as of October 2013 the SEC still is in the process of clarifying provisions of the bill.

What we know so far about the JOBS Act, however, is the following:

1. Smaller companies can limit their obligations to report financial and other information to the SEC.

2. Investors with a net worth far below $1 million (the traditional threshold for sophisticated investors) can buy risky IPOs.

3. Speculative investors such as hedge funds can now advertise their funds.

4. Smaller companies can skip provisions of the Sarbanes-Oxley accounting rules introduced after the Enron debacle.

On the one hand democratizing investment participation allows non-sophisticated folks an equal chance to get-rich-quick by participating in risky investment schemes. In addition, I’m all in favor of entrepreneurs accessing capital more cheaply and with fewer barriers.

On the other hand, I probably don’t need to spell out the obvious opportunities for fraud, trickery, moronic investing choices, and inappropriate speculation all opened up by the JOBS Act.

All in all, we’ve reintroduced more Wild West into the system. The Arian Foster represents the highest profile example of this new Wild West. This will be interesting to watch.

Historical celebrity-backed investments

Baker goes back in time to explain the most famous example of combining a celebrity entertainers future earning with Wall Street magic – The famous David Bowie bonds. Bowie needed money for his divorce as well as separation with his manager, but did not want to sell outright the rights to his song. Instead, a financier created bonds backed by the future royalties from Bowie’s existing hits.

As an investment, Bowie bonds represented a safe, limited-downside opportunity from a well-defined revenue stream. An insurance company – a typically risk-averse investor – bought all $55 million Bowie Bonds in the late 1990s. Following payment of the bonds, Bowie retained future royalties and any excess beyond what the bonds required. Presumably he still owns those songs, while Prudential got paid a modest return on its bond investment.

The Foster deal, by contrast, only works as an extremely risky start-up type investment. We really don’t know what kind of future earnings Foster will have. Fantex retains discretion to make payments, or to convert Arian Foster stock into general stock in Fantex. Foster ‘stock’ will trade on a Fantex exchange, with Fantex earning 1% per transaction. Practically anything can happen to a football player’s earning potential, many of them bad.

I’m sure there has to be some situation in which investors make money, but I’m equally sure Fantex depends on the ‘fantasy-football’ fun aspect of this to attract investors, rather than the correct pricing of investment risk.

“You own Tom Brady in your fantasy team? Bro, that’s nothing! I own a piece of Arian Foster’s future earnings, Bro! I’m CRUSHING IT Bro!”

That kind of thing.

Concluding thoughts

If Fantex finds enthusiastic investors, Foster gets upfront money, and fans have a good time with the opportunity to gamble with real dollars and at least some probability of upside. All this sounds cool to me.

To be clear, as an investment I find this an absurd idea, and even the ambiguous morality of it also deserves attention.

I appreciate, however, the opportunity to talk about securitization – of David Bowie royalties or any other cashflow – in reasonably complex yet digestible ways.

Most importantly, I’m interested to see how the JOBS Act turns out.

Unleashing capitalist potential – Pandora’s Box!

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June 5, 2012July 23, 2013

Facebook IPO Bust? Not To Your Banker!

A friend of mine who bought Facebook shares in the IPO complained last week about its miserable performance post-pricing, and I began to get flashbacks to my time on Goldman’s bond sales desk on new issuance days. I wanted to tell my friend our old bond sales new issuance motto,[1] But, to spare his feelings, I kept my cynical tongue firmly in check.

A not-uncommon new issuance timeline went like this:

10:00 AM: Goldman’s bond syndicate desk would issue hotly oversubscribed bonds to our institutional clients, who would yell at us for not giving them more securities at issuance.

10:01 AM: Sample Dialogue

Favorite Institutional Client: “I’m a *&^% BIG SWINGING [client], and you gave me this *&^#$% allocation? You guys suck!”

Me: “Um, ok.”

Favorite Institutional Client: “Seriously, you @#$%-Heads, lose my number!”

Me: “Would you like to sell them back to us?”

Favorite Institutional Client: “No way, I’m buying more on the open.”

10:05 AM: Quite frequently, the flippers who obtained hotly oversubscribed bonds sold immediately[2] after issuance, driving the price down.

10:20 AM: The same institutional clients who didn’t get enough bonds would then yell at us for selling them such a terrible piece of shit in the first place and why didn’t we support (i.e. commit Goldman’s capital to prop up) the newly issued bonds in the aftermarket?

In the face of such mental artillery fire, we built blast-resistant concrete bunkers around our consciences.

The senior bond salesman would turn to the junior salesman having pangs about his clients losses.

“You know,” he’d say, “Today the issuer made money, and Goldman made money, and clients lost money.”

…beat…

“But hey! Two out of three ain’t bad!”

That always made us smile.

Look, I’m not saying my friend deserved to lose money for participating in a hot IPO. I’m also not saying, as some have, that the issuing bank’s only duty is to pump the new issue price to its maximum saleable level, investors be damned.

In fact, issuing banks know they have both an implied ethical duty to their purchasing investors, as well as long-term financial incentives, to issue new securities at a compromise level that satisfies the issuer’s need for capital yet allows long-term investors to also earn a return on their capital. As is quite nicely articulated here.

But, let’s just say that in the heat of battle and the excitement of a new issue, ethics and long-term interests occasionally take a back seat. To say the least.

To my friends who lost money in the Facebook IPO, Meatloaf said it best:

Your banker wants you, and he needs you, but there ain’t no way he’s ever gonna love you. But don’t be sad, because two out of three ain’t bad.

[1] Hint: It’s in the Meatloaf graphic above

[2] Seconds. Sometimes minutes. Rarely hours.

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