Regulators are twitching and investors are itching.
So how does Wall Street respond?
With two exquisitely badly timed comedies of errors that have the whole world watching and doubting again. Just when you thought it was safe to go back in the water….
JP Morgan’s killer whale and Facebook’s investor defriending constitute one of the greatest one- two punches financial historians have ever recorded. Literally at the moment that work on Dodd Frank was leavened, no less than the leader of the pack trips on a trade. Actually it is technically a” position”, which means that losses continue to mount.
And Facebook, born under the sign of the Winkelvii under circumstances questionable enough to cost about $60 million to sanitize, chose to increase the size of its offering 25% even as it was reducing its revenue forecasts.
Each bears scrutiny. First JPMorgan. For them a $2 billion loss in any context is far from a crippling blow. The holding company earned about $19 billion in the trailing twelve months. With total firm assets of over $ 2 trillion, JP Morgan can more than handle the tribulation. In fact, other parts of the organization have already more than made up much of the loss which is mounting steadily.
But two lingering concerns cast a very long shadow. First, this trade was executed in a part of the firm tasked with hedging the firm’s position. Were they paying the lady in charge $15 million last year just to hedge some corporate risk? Or did the risk managers experience mission creep? Is a hundred billion dollar position called the whale trade really the job of the hedging department—or was this proprietary trade a wolf in sheep’s pinstripes?
But that is the minor part of the equation. JP Morgan has some of the most outstanding people on the Street and arguably the best CEO. What has people rattled is the nagging question: If the best can lose a few bil, what can the mere mortals stashed in the other big buildings in “The City” be doing? How much damage can the JV do when they imitate the big dogs? In my opinion that sincerest form of flattery had more to do with the bad trades that brought us to our knees in 2008 than any fraud…it was a more dangerous combination- envy and stupidity. The Goldman and Morgan Stanley wannabe’s and the green imitators of hedge fund czars played me- too ball which worked just fine until they got lost in the maze.
So here are two pieces of advice:
For JP Morgan and the industry leaders- everyone is watching…yep, everyone. You don’t commit a foul when the ref is standing right there with a whistle in his mouth. Even if you are earning a huge return on your bets—what is the bigger thing you are gambling? (Hint: it’s your entire franchise) Try having your risk managers monetize that- (Hint # 2 it’s worth a hell of a lot more than $2 Billion).
And for Facebook, most every hot deal and a lot of not so hot ones generate more demand than supply before an offering. In case you missed it, that’s not the target. How a stock performs in the aftermarket is the target. Morgan Stanley and your underwriters know better, which leads me to surmise you may have pushed them every bit as much as they pulled you. Now many great performers like Sun Microsystems, Amazon and others debuted to street- wide boos and broke their offering price only to provide handsome returns to the patient investors.
But any way you look at things you pushed it—raising the price to the high end of the range, increasing the size of the offering by 25% in the closing days of the deal, increasing the notoriously skittish retail component of the offering to 25% hoping they would invest like lemmings. Please don’t hide behind the ten times over subscription—you have to size and price an offering to insure those hungry investors continue to buy in the aftermarket. That doesn’t happen when people get more stock than they expected ( as I did—full disclosure). Otherwise they sell into the market rather than buy (as I did –full disclosure) .
I rented that stock for one reason. I was uneasy about your financial brand. Yes Facebook you have a financial brand too. Yours was tainted by the Winklevii dispute. This was your chance to set the record straight and brand yourselves as a straight shooting reasonable counterparty who wasn’t opiated by the klieg lights of a hundred billion valuation and being the biggest IPO no matter what. You are a company with revenues and profits, actually plenty of both.
So when I read in the NY Times about all the great advisors you had on your payroll, I am tempted to give you a decent piece of advice for free. Consider it a memento from someone who rented your stock for a few hours: Next time you are reaching out for a deal, leave a little on the table for the other guy.
Do that a few times and you will have a financial brand that is more valuable and lasting than a volatile stock price. People don’t buy stocks; they buy financial brands they can trust.
That leads to long term appreciation… of every type.