Morgan Stanley (MS) was the lead underwriter for Facebook's (FB) initial public offering, and liked the stock so much that it bought in bigtime. Now, Morgan Stanley investors are paying the price.

The company's own money-management team bought more than 2% of the shares sold in the offering, Bloomberg reports. Its Investment Management unit bought 10 million shares at $38 each, plowing about $380 million into the IPO. In fact, Morgan Stanley has become the sixth-largest shareholder in the company.

A dozen funds in that unit each spent 6.8% of their net assets buying Facebook shares at $38 each, which was the IPO price. But shares of Facebook have tumbled since then, closing Wednesday at $23.29, and some of Morgan Stanley's funds began unloading the stock in June.

One of the biggest funds buying into Facebook was Morgan Stanley's Focus Growth (AMODX), which bought 2.81 million shares. Facebook became that fund's third-largest holding. And now, the former superstar fund trails 73% of its peers in terms of growth this year, returning only 15%. It even lagged its benchmark, the Russell 1000 Growth Index ($RLG), which rose 19% including dividend reinvestment.

This news has produced any number of theories. Let's turn to Dealbreaker for a few of them. Did Morgan Stanley know this stock was going to be a dog, and did it bite the bullet and take more shares internally so as not to anger clients, wonders Matt Levine. Or did Morgan Stanley volunteer to help Facebook by taking a big chunk of said dog?

But Morgan Stanley isn't crying too hard over this. As the lead underwriter in the IPO, it received the largest share of the estimated $100 million in profits made collectively by the banks underwriting the deal.

The underwriters made those profits mostly through a win-win scenario common in IPOs, The Wall Street Journal reports. The underwriters get to sell about 15% more shares than the total deal size. They're selling shares they don't actually own, in essence shorting their own deal.

If the IPO is a disappointment and the stock price drops, the underwriters go in and buy those shares at a lower price than which they sold -- thus making a profit. If the IPO is a success and the stock price rises, then the underwriters go in and exercise their overallotment, buying more shares at the IPO price -- thus making a profit.

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