Facebook-Goldman: Where Is the S.E.C.?
newyorker.com
newyorker.com
Problem was, as it came out, that MS never actually bought the bullion and thus was charging storage fees on non-existent items. If you went to remove or claim your silver, they just gave you cash as settlement, making the scam opaque.
The cynic in me says GS will do something similar, like put a very high valuation on the FB units they sell, both marking them up a great deal over what they paid FB for it AND inventing some of the units out of whole cloth (i.e. issuing 10,000 units for sale when they only bought enough FB for 1,000 units), then, over time, the FB units will be seen to "decline" in value and GS will pocket the profits twice, first on the markup of the units, then on the decline.
When you deposit money in a bank, they create 9X the loans of what you've deposited.
I'd bet if you read the fine print on the MS offering it would tell you that this is exactly what they were doing. MS & GS are too smart and too big of a target to engage in outright fraud.
Source? I thought what they did is loan out 90% of what you deposited.
Example: you deposit $1000 in a bank with 10% reserve policy ($100 set aside as capital reserve of the bank).
Bank loans out $900 to customer for new office furniture; then that money is used to pay the office store, which is another depositor at the bank - which then counts as another deposit, 10% of which is set aside as reserve ($90). Another loan of $810 is then made, etc.
"Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the change in excess reserves of $90 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000), e.g.$100/0.10=$1,000."
The banks are only required to hold reserves of something like 10% of what they've lent out, depending on the country. That means, effectively, that when you deposit $1000, the bank then turns around and lends $10,000. Most of the money in the world exists only on balance sheets.
When you deposit physical cash, the bank gains an asset, ie: that cash. It gains an equal liability, ie: the amount it credits your account. Thus the sum total of the amounts deposited and the amounts loaned must not exceed 10X the amount it either has in its safes, or that it has stored with the central bank.
Sorry, does not parse. When the bank lends you money, it's an asset for them. Like you mentioned elsewhere in your comment, deposit accounts are liabilities for the bank, because somebody (the depositor) could come calling for the money.
What happens is that you loan the money, it gets spent, and ends up in your deposits again. THEN, you are effectively counting a dollar as: "Owe $ to original depositor, Get $ from person taking the loan, Owe $ to new depositor". Adding up to 1 dollar. Except when reporting dollars on deposit, you say 2.
Individual banks don't "create" money. But as a quirk of lending and taking deposits, the banking system creates money, at least on the books.
A search for "morgan stanley silver bullion storage fees" will get you lots more links, commentary, etc.
It's interesting that now Facebook is doing a sort of converse of Berkshire's actions; that the pain of a public company is so onerous that having a bank involved is apparently seen as an advantage.
(Goldman probably got a look under the hood, but I doubt they will pass that along to the investors they hope to sell Facebook investments to, so both FB and Goldman will benefit from uninformed speculation.)
As to who will read such a prospectus, that's likely a different beast altogether.
It's my belief that FB is more likely to be in a pre-IPO Google situation right now, that is, that they're sitting on more than people realize, not less. I recall Google routinely requiring academics to cut the server and request numbers by a factor of 10-100x when giving talks about what was going on, pre-IPO. A luxury I'm sure they would appreciate still having.
Let's be specific about this "pain". What I recall from various articles, Facebook is very reticent to have it's actual revenue numbers floating around.
One might argue that there is too much regulation of public companies in general but the specific regulation that a public company has to engage in public disclosure seems sound to me. Facebook's skirting of this regulation seems questionable to say the least.
He knew his mom-and-pop investors needed liquidity, and wasn't able to buy them all out himself, so he went for the market option. But, he was clearly ambivalent about it. I believe his first instructions to his floor trader were that he hoped there would be no transactions in the first year of listing.
The only reason he listed was to get his current shareholders some liquidity; he's quite clear about this in his annual letters from the time. He had no need for or interest in the liquidity himself, and was, I would say judging from his actions over the next 20 years, pretty happy with his then-current disclosure situation. He did pretty much everything he could to keep Berkshire out of the drive for quarterly investment earnings game for public companies, and worked hard to reduce any requirements for reporting on what was going on at Berkshire.
Also, agreed, that high share prices helped him make a point that he spent many decades beating the drum on: value over price.
The Fed, SEC, and Federal Gov't collude to prevent the free market from working and bad ideas from failing. Look at a graph of global IPOs vs. IPOs on american exchanges since Sarbox was passed. You'll see how the overly onerous regulations prevent the market from functioning properly and create an environment of moral hazard where undue risks are taken, and investors who correct the market have their returns taken away from them. The investors who shorted AIG, Bear Stearns, GS, Citigroup, BOA, etc and recognized their impending fiscal collapse should be handsomely rewarded for their prescient view of the market. Having your company collapse is the right way to handle reckless investing.
Hopefully the SEC stays out of it, an ETF/Shell corp for Facebook shares is the ideal balance between public money and few onerous requirements. If an investor feels that the lack information available for Facebook prevents an informed decision from being made then perhaps they should not invest.
Yes, you may lose your shirt investing in Facebook, but you might also make a lot of money. I don't see a problem with either outcome.
This is a temporary loophole that will be fixed. I don't begrudge facebook a thing. They get most the upside of an IPO with nearly none of the downside. But to act that it's perfectly alright because, hey, caveat emptor... i disagree strongly with that.
However I agree entirely that SEC always fights the last war like the French building the Maginot line, and that this type of innovation is just a response to the Sarbox rules.
The same logic used by the SEC suggests that every limited partner of every VC that invests in any startup should also count to the total number of investors.
That being said, Goldman Sachs and its investors will likely insist on financial disclosures from Facebook and maybe even some governance rights that, while not quite public company-strength, will lead to Facebook disclosing more information to more people than it had previously.
This is exactly how Goldman managed to be so successful in the subprime crisis. When they decided to unload their holdings, they were sold to their clients. There is a strong conflict of interest at Goldman between shareholders and clients.
My understanding is that Goldman can do two things to make money here: 1. charge fees on transactions and 2. decide when and how to sell/buy shares for themselves.
Whether the clients should be protected by the SEC is another matter.
Starting a big long thread about how Goldman is a vampire squid or whatever Taibbi called them is a waste of time, because I'm not arguing that Goldman is a good company or a bad company or that its interests are aligned with its clients.
I'm saying that the logic that assails Goldman's Facebook vehicle is nonsensical; Goldman is doing nothing more sinister than creating an ad-hoc venture capital fund and using it to invest in Facebook. Does every California public employee also count as a Facebook shareholder if CalPERS is an LP of a VC that invests in Facebook?
(Answer: no.)
A venture capital fund is diversified over many investments -- that's why it's a fund. A venture capital "fund" that invests only in Facebook is a fund in name only.
Also, unless you're a lawyer specializing in securities law, I doubt you know the answer to your own question. State employees can (and do) initiate lawsuits against CALPERS, and CALPERS has sued public companies on behalf of state employees. The pensioners clearly have some rights as investors.
Meanwhile, what does diversification have to do with the structure of a venture capital fund?
No, that's not what I said. I said that the investors clearly have rights -- presumably including the right to know the financial prospects for their investments. CalPERS invests some money in private equity funds and limited partnerships, but that just begs the original question. I don't know what the disclosure requirements are for companies involved in that kind of investment, but then, I'm not a securities law expert.
Do you actually know the answer, or are you just asking rhetorical questions in the hope that people will interpret your questions as statements of fact?
"Meanwhile, what does diversification have to do with the structure of a venture capital fund?"
Risk.
Are you saying that if Matasano took funding from a VC that had CalPERS as a limited partner, we might have to make additional SEC-mandated disclosures to account for CalPERS investors? You're right: I can't tell you that I know that we wouldn't; I can only call "BS" and wait for someone else to add facts.
Not really. You argued that Goldman Sachs created a venture fund, and that therefore, Facebook is immune from disclosure laws. I'm saying that there's a substantial practical difference between a venture fund and what Goldman appears to be doing here (not the least of which are issues of investment diversity) and that, even if that weren't true, it's not clear that financial disclosure laws can be bypassed so easily (the CalPERS digression was yours). Other experts happen to agree on these points, so I don't think I'm coming out of left field.
But since I'm not one of those experts, and you don't seem to have any special knowledge beyond your own opinions on the matter, this thread is more heat than light. I'm done with it. Counterarguments aren't "straw men" just because they don't directly refute your original points.
But, yes. Given everything that has happened in the last 15 years, we should be expected to believe that the private clients are getting screwed by Goldman/Facebook.
Creating an ad-hoc venture capital fund to invest in Facebook can be both legal and sinister.
It's a process where the SEC asks the investor, "OK, you have a million dollars. Are you sure you know what you're doing?" And the individual says, "Yes, I'm willing to accept the additional risk that comes along with less oversight (ie. more flexibility)".
If an investor is putting money into the pot based on just the "Very Good Valuation" argument, and they've acknowledged the risks, they are not eligible for certain protections (because those protections also limit certain financial vehicles).
In a similar vein, I feel no sympathy for the majority of the people who gave their money to Bernie Madoff. I do, however, believe that there should be legal consequences for money managers who make those types of investments without proper due diligence.
Also, it's not particularly important to be able to claim due diligence.
If you want to reduce speculation and uninformed trading, at least one way to do that is to give companies rights over who trades their shares and under what circumstances. You're not forced to sell your house to anyone, so why should you be forced to sell your company to anyone -- particularly day traders who will just introduce volatility and aren't in it for the long haul?
A long overdue organic reaction to the silly laws passed in the wake of the last financial crisis. No doubt we will see similar workarounds for the work of art that was "FinReg", though those workarounds may take the form of debuting on the Hong Kong Stock Exchange rather than the NYSE.
It's a little known fact, but Google also made use of certain legal workarounds to avoid going public for as long as possible (among other things, they split the company into two units of 499 people apiece, or so I recall).
Don't see how that follows. If you are restricting the market to only a fixed number of sellers, you are leaving a potentially significant amount of money on the table.
You're doing that to prevent the abuse of your company's shares by investors, who generally have more money than you do.
Imagine if you didn't have the right to turn down a VC who only wanted to put in money once you got hot, and then came to your board meetings as a shareholder and caused problems. Or to be criminally responsible if an accountant somewhere in your organization makes an error. That's what it is to be a public company in the post-Sarbox/Finreg US. This is about protecting the entrepreneur, not about protecting the old money.
Once those former employees were rounded into nothingness, they performed a forward split to restore everything to their previous levels.
I thought that was a rather clever workaround.
Looks like it works in finance, too. And a whole lot of other disciplines.
Each level of indirection means a middleman somewhere is taking a cut.
(In general, it's really not as evil as it sounds. I write software to help price interest rate swaps, and those don't really ring any ethical alarm bells: http://en.wikipedia.org/wiki/Interest_rate_swap
I don't think the Goldman/Facebook thing is particularly evil, either. The government says that normal people can't buy Facebook shares, but normal people want to. Goldman invented a solution to the problem, and will profit from doing so. "Adding value" like this is great when it's a way to sell ads to web 2.0 users, but not when it's a bank? Why?)
Google had been a dominant search engine for years before they went public, and I can't imagine they turned down many $50 billion funding rounds simply to avoid turning public before their IPO.
The Securities Exchange Act of 1934 sets forth certain requirements for companies to register their shares with the S.E.C.
Specifically, Section 12(g) requires that a company register its securities with the S.E.C. if it “has total assets exceeding $1,000,000 and a class of equity security … held of record by five hundred or more … persons…”
Sounds to me like this law has been around for a while.