Monday Grok: Bankers bet Facebook stock would fall while advising clients to buy

Calls growing to rein in Zuckerberg at Facebook

So a bloke takes a company from nothing to $104 billion dollars in just eight years and now everyone is calling for his head on a pike. What’s going on?

Well it’s probably a lot to do with the fact that in the last four months the same bloke has taken the company from $104 billion dollars to $50 billion. Except this time he was doing it with other people’s money.

We are talking about Mark Zuckerberg and Facebook obviously, and the growing disquiet which broke open over the weekend. This included suggestions that perhaps someone else might run the world’s biggest social network better than the man who made it the world’s biggest social network in the first place. For the record, Grok doubts that.

But it gets even funnier, and not in a good way. It now transpires that the very same investment banks who pushed Facebook’s IPO upon their clients, despite being in possession of damaging financial data, were also shorting the stock in a process which banks describe as “stabilisation” and the rest of us would describe as, “Are you fracking kidding me?”

For those of you who may be unfamiliar with the language of the market in simple terms that means the underwriters of the stock were using the rules of the game to place bets that the stock’s value would fall. That way they win whether they are coming or going.

If that strikes you as bloody disgraceful then here’s why: It is a bloody disgrace. But it’s also how the system works — the same as it ever was.

First, to the calls for Zuckerberg’s head.

On its website, <i>Time Magazine</i> carried a report headlined, “Is it Time for Facebook’s Mark Zuckerberg to step aside as CEO?”

The report stated: “Zuckerberg may be a visionary, but visionaries don’t always make great CEOs. And with Facebook’s stock hitting new lows on a daily basis, many Wall Street observers are suggesting that Zuckerberg needs to start acting like a real CEO, and fast — or step aside and leave the job to someone who doesn’t mind wearing (and being) a suit.”

The story identifies the leading members of the lynch mob including Forbes’s Nathan Vardi , Reuter’s contributor John Abell and Seeking Alpha’s contributor Charles Payne.

As to the likelihood that calls for Zuckerberg’s resignation will be taken seriously, the <i>Washington Post</i> made the very obvious point, “A resignation seems unlikely—not only because he has defenders, but because his controlling interest in Facebook should keep him making decisions for a long time.”

The Post concluded that Zuckerberg’s real priority is not keeping his job, but rather “keeping his people focused on long-term goals while still meeting some of Wall Street’s short-term demands.”

And now to the question of betting that a share price will fall while advising your clients to buy the stock and despite knowing in advance that the company will probably miss it targets.

Once again, there are far better people to explain the intricacies of how this works and why its legal than your humble Grok, so we will defer to our favourite stock follower Henry Blodget of Business Insider. The story was actually sourced from the WSJ but, as it is often the case, BI wrote about it in a way which is far more accessible. In fairness to BI you should click here for the full story.

Here’s a sample to get you started: “Right now, reports Lynn Cowan of the Wall Street Journal , while Facebook investors digest the fact that the stock has now dropped to $19 from an IPO price of $38, Facebook's bankers are divvying up another $100 million they made on the Facebook stock, this time in a much less visible fashion. How did the bankers make this second bonanza? By shorting Facebook's stock. By, in other words, selling Facebook stock they didn't own and then cashing in when the price dropped. Seriously!”

For a study in contrasts, read how the WSJ covered the same story in its report headlined “Morgan Stanley distributes Facebook IPO profits”.

Andrew Birmingham is the CEO of Silicon Gully Investments. Follow him on Twitter @ag_birmingham. Here is the former associate publisher of the Australian Financial Review.

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