Whose Money Is It Anyway?

Occasionally we get to see the folks on Wall Street actually engaged in the job we expect them to carry out, creating capital. All of the other nonsense that takes up most of their time –trading bogus investment instruments, pawning them off on unsuspecting clients and then laying bets that they will fail– are not interrupted, of course, but some social good does bubble up to the surface of the slime pit in lower Manhattan from time to time.

Initial Public Offerings (IPOs) are perhaps the most visible benefit provided by the monster (in all defining aspects of that word) banks like Morgan Stanley, Goldman Sachs and the three or four other names we have become painfully aware of since they sent us crashing into a recession in 2008.  They gleefully took our money to forestall a world-wide economic collapse. And while we are slowly climbing out of the crater they left us in, they are doing very well thank you, making money hand over fist.

Actually they are doing exactly what they were doing before, the same things that dumped us into the sewer. We thought our money was supposed to help small businesses and other job creating stuff. But that’s hard and it’s so much easier to succumb to their gambling habit of old. That’s what some folks see even creeping into the IPOs that are beginning to turn up again on Wall Street.

Merrill Lynch and Morgan Stanley were hired by LinkedIn, the B2B social media site, to take the company public. The banks’ role was to evaluate LinkedIn and judge what the market would pay; their figure was $45.00 each for the just under eight million shares in the offering. That netted LinkedIn about $350 million, a healthy infusion of capital. However, the $45.00 turned out to be way low; by the end of the first day the stock had rocketed up 110%. In fact the minute it went on the market it jumped over 80%. So the investment bank’s customers and a few others bought low and probably sold high, doubling their money in one day. Money that some believe should have gone to LinkedIn.

It’s easy to tag Merrill & Morgan as the bad guys. With their fingers on the pulse of the market they should have known the run-up would be huge. On the other hand, LinkedIn was the first of the social media companies to go public. With a yet-to-be proven business model that only pushed $16 million to its bottom line last year, LinkedIn was hardly a slam-dunk to rocket into Wall Street Stardom. When you take into account that the Street still has the dot.com bubble in its rear view mirror, the $45 price doesn’t look so bad. Had the banks overpriced the shares and seen them plummet when they hit the market, the legal beagles in the banks would have been busy for years defending a storm of lawsuits.

There is an alternative, an auction that allows the investors, the market, to set the price. While that description is a bit too simple, the auction model IPO seems a better path. It doesn’t take the banks out of the process completely, but it does give the company a lot more control over who gains from the offering. Take away for the other IPOs in the wings? An auction will put more of your money in your pocket.