You know that the hand-wringing over the almost 25 percent drop in the value of Facebook Inc.'s stock since its May 17 IPO has reached a new level of disproportion when ABC's "Good Morning America" weighs in with the idea that maybe Mark Zuckerberg should abandon his honeymoon and return to Silicon Valley to somehow make things better for the gullible investors who got singed.
Lots of reasons have been posited for the Facebook IPO "debacle" -- as the news media like to describe it -- including that perhaps Zuckerberg, the company's founder and chief executive officer, and his management team failed to disclose declining quarterly advertising revenue in a timely way. Or that Nasdaq OMX Group Inc. failed to process initial purchase and sale orders properly on IPO day. Or that some underwriters passed "quiet guidance" to big, institutional investors about Facebook's financial prospects but not to smaller investors. Or that technical "trading glitches" caused the problem. Or that Morgan Stanley, Facebook's lead underwriter, botched the whole IPO process.
Burned investors will grasp at anything -- except their own role in fueling Wall Street's Facebook IPO hype machine -- in an effort to recoup some of the billions of dollars they have lost as the stock continues to slide.
When will small investors finally get the message that investing in IPOs is a fool's game and that yet again they served as mere grist for Wall Street's IPO selling machine? The current IPO market -- controlled by Wall Street's cartel of five or six leading firms -- exists only to benefit three groups of constituents.
Foremost are the Wall Street banks themselves, which reap hundreds of millions in fees from the IPOs whether the resulting stock price goes up or down.
The second group consists of Wall Street's big institutional trading partners -- the ones that provide banks with huge fees every day of the week. IPOs are priced to put money in these big shareholders' pockets, either by underpricing the company in the first place so that it "pops" when it begins trading, allowing the institutional shareholders to flip the stock quickly after it rises in early trading, or by giving them information that will allow them to get out fast while smaller investors are getting in.
Third on the list of priorities is the company being taken public. The Wall Street underwriters strive to get just enough value in the IPO to keep the company's management and early investors happy, while also leaving enough on the table so institutional investors get their "pop."
Small investors don't make the list of important constituents. Their concerns are nearly irrelevant to the Wall Street cartel. Wall Street sees little point in keeping them informed or helping them make wise decisions.
That Facebook's IPO would be a product of the Wall Street hype machine was obvious from the beginning. For at least the past 18 months Facebook has been awarded one ridiculous valuation milestone after another.
It's easy to blame Wall Street for all this hype, and it's easy to blame Facebook's management for whipping up the valuation frenzy. It's also easy to blame Nasdaq for botching the orders or Morgan Stanley for mismanaging the process.
The truth is that if small investors simply remembered they are nowhere to be found on the list of important constituents for an IPO such as Facebook's, and simply stayed away, the traditional Wall Street IPO machinery would break down. Is that a lesson that can be finally learned, once and for all?
William D. Cohan, a former investment banker and author of "Money and Power: How Goldman Sachs Came to Rule the World," is a Bloomberg View columnist.
