Time and again I did post on the IPO of Facebook and then disclosed the paper on banning of the IPOs. Let’s disclose some conflicts of interest. The Facebook IPO and the underwriters’ price stabilizing activity on its first trading day, Friday May 18. And Fed researcher noted, that there was a whole lot of buying at the IPO price of $38, which was probably largely due to the underwriters and which kept the stock above $38 going into the weekend before it cratered Monday morning. But they also note that there was a whole lot of buying at $40, which kept the stock above $40 for … 15 minutes.
There is much to be fascinated by here. Like, one: is it true? The rough time guess was that the underwriters bought in about half the (63 million share) greenshoe at $38 on the Friday of the Facebook IPO, leaving them short 30-ish million shares at $38 that they bought in at Monday’s $34-$35 prices, making them a ~$100 million profit. This accords with media reports citing people familiar with the matter who said that the underwriters made $100 million on the stabilization.
The New York Fed comes out slightly differently; they think that the syndicate bought ~half of the greenshoe at $38 (for no profit) and ~half at $40, losing two bucks a share for a total expense of $66 million. That’s a $166 million swing on a deal with $176 million in total underwriting fees.
What do you make of this? Its based basically on the fact that, while supply of shares for sales was sort of smooth and normally distributed around ~$41, there were outsized clusters of bids at two exact integer prices, $38 and $40, which certainly seem suspicious and as though they came from underwriters rather than independent buyers. This is not slam dunk evidence – as they say “since our data do not identify individual investors, this identification is based only on indirect inference” – but it’s plausible.
I have some doubts, though, because, um, if Morgan Stanley et al. actually spent $66 million helping its investing and issuing clients by stabilizing the stock at above the IPO price, why would all those people familiar with the matter tell the press that instead Morgan Stanley et al. made $100 million by neglecting their stabilizing obligations and hosing their clients, at the exact time that Morgan Stanley was pitching for more tech IPO business on the back of Facebook? One obvious answer is “because those people worked at competitors and wanted to screw Morgan Stanley” but this is not a thrilling answer; Morgan Stanley by all accounts has telephones so could correct the record if things were as the Fed thinks they were.
The underwriters’ “obligation to the firm” – i.e. Facebook – are more customary than binding; the underwriting agreement gives them the greenshoe option but doesn’t say how they have to use it. Morgan Stanley could have done nothing to support the stock, bought back the whole 63mm shares at $34, and made $250 million, without Facebook having any legal claim against them. They gave up at least $150 million of that profit, and maybe threw away all of it and $66 million besides, because that way they get to keep having greenshoes. Which are sometimes profitable – as Facebook’s probably was? – and sometimes not – as Facebook’s maybe was? – in themselves, but which are more important because they let you keep having IPOs: the greenshoe and accompanying stabilization definitely makes investors more willing to buy in unproven IPOs. And that means fees, and, like, having an underwriting business and stocks to trade and all that good stuff.
The greenshoe is a classic case of long-term greedy: when an IPO is looking like it will break the deal price, you can either make lots of money at your clients’ expense with no immediate repercussions, or you can spend lots of money to help your clients with no immediate benefit, just for the long-term good of your franchise. I suspect Morgan Stanley ended up somewhere in the middle, making a good-faith but not foolhardy effort to prop up the price and giving up millions of potential profits while still ending up with some windfall. But in these dark days, with everybody and their muppet accusing banks of turning their backs on their long-term-greedy roots and seeking out the quick buck, it’s nice to see that some people believe in the old model of banking.