The biggest loser in Facebook's disgrace

It was up to the bankers and the execs to figure out a stock price where everyone won. In the end, the little guy got the shaft.

By Jim Cramer Jun 5, 2012 9:38AM

Facebook (FB) is moving in on that key 13-and-under demo! Business must be really rocking there to reach down to that cohort, right?


I don't know about yours, but I have to tell you that the sour taste of the Facebook deal hasn't left my mouth yet.


If you go back just a couple of weeks, we were at a crucial moment in time. Individual investors have been crushed for so long now that it was almost impossible to think about what could bring them back to stocks.

The lies, the disasters, the promises broken, the unreliability of the system, the inability to prosecute the so-called bad guys who almost brought down the house all made it so retail investors would be as nuts to stay in the stock market as a depositor would be to stay with a Spanish bank. It was just not rational for many to take a beating like this, particularly because the ETF craze and indexing, considered to be the only real ways to make money (false, but what can I say) had done so poorly for people.


But the whole industry of financial services and its regulators really hasn't shown an ounce of remorse whatsoever. The industry caters to the big bill payers, not the small ones, even as the small ones together constitute the backbone of the markets and are needed to keep them deep and liquid.


The industry itself has very little self-examination. You almost never hear anyone say "We have to worry about regular investors," because regular investors as individuals don't pay the bills even though in an aggregate they can be huge for the market's depth and its lifeblood, volume.


Indeed, most of the trading, and almost all of the attempted trading, comes from machine to machine, where very little is made or from giant mutual funds that are catered to for their every whim. But the buyer of 100 shares of this or 50 shares of that is a waste of time and too expensive to help. Financial services have become like any other business. Many firms believe you can't make money servicing smaller clients with humans, just as banks want smaller clients to use ATMs and not tellers. It's just a fact of life to these big giant financial outfits.


And then along comes Facebook. Here's a big visible offering where, if there were any rationality or tradition of fairness on Wall Street, everyone should have been allowed to win. Think about it. The insiders have a very low basis. They win even if the deal is priced at $20. The individuals who know it would love to get in there and feel like it is worth buying stocks again. It was up to the bankers and the execs at Facebook to figure out a price where everyone won, because believe me, it doesn't do any good for the deal to flop the way it did anyway.


And what do the bankers do? They succumb to greed, and they favor the company over the clients, and then at the last minute they favor the big clients over the smaller buyers by telling the bigger clients that, as the documents say, things aren't as good as we thought at Facebook. Believe me, although you aren't supposed to differ from anything written about how the business is, you can certainly tell prospective buyers how the deal is shaping up. And from everything I am hearing, the word was, at the last minute, that it wasn't shaping up well at all. But too much ink had been spilled and too much pride had been shone to start walking the deal back.


The result was the disgrace of a stock lifetime, then compounded by Morgan Stanley's basically saying shame on the buyers if they thought they could make a quick buck.


Shame on Morgan Stanley (MS) for saying that. Everybody in this business knows the game: Everyone is supposed to win on a deal, especially a popular deal where there can be winners, and Facebook was the apotheosis of this kind of deal.


Forget how horrid the Nasdaq ($COMPX) was, too. It had gone too far to pull back at the last minute when it knew it had no control of the opening whatsoever and its systems were way too backward to handle the influx, as amazing as that is, given how it paraded around like a peacock, telling us how well it would go.


The essence of what really went wrong was that Morgan Stanley favored the sellers more than it should have. Why that was, we don't know. Was it because at the last minute things had gotten so bad at Facebook that it just had to put on a big show and tell only some traders how bad things really were but rely on moronic over-the-transom retail to keep the deal in the high $30s? Was it because the Facebook execs demanded this pricing? Was it because the syndicate desk actually thought it had demand at these prices even as many retail execs indicated that they were overwhelmed at the last minute with stock? I find it hard to believe that syndicate didn't know how bad the deal would fare, given that some branches were given allocations well in excess of what demand was, a sure sign that syndicate knew things had gotten out of hand.


Remember how the process works. In a putative hot deal, you should get only a fraction of what you put in for. If you put in for 10,000 shares, you are hopeful to get 1,000. If you get 2,500, that's a huge win. But if you get 5,000, you begin to get nervous because it means there may not be as much demand as you thought. If you put in for 10,000 and get 10,000, you know you're sunk. But in this deal I know brokers who got well in excess of their 10,000, to the tune of a factor of twice or even three times what was requested, with the idea that somehow they could give clients a real break by getting in.


Allocations like that show pure greed, typically on the part of the issuer, because Morgan Stanley makes the same amount of money either way. But it also could be because Morgan Stanley totally botched the deal, as it knew that the fundamentals had gotten much worse than thought and it winked and nodded to its biggest clients in a legal but horribly unfair way.


Either way, whether greed on the part of the issuer or failure to gauge real demand on top of faltering fundamentals by Morgan Stanley, the individual investor was the huge loser.


And he has stayed the biggest loser. Maybe the 13-year-old-and-under crowd will help ameliorate the downturn in the fundamentals that the deal is certainly signaling. But it is a little too late to help the individual who was the mainstay of our deep markets. Just a shameful exercise all the way around, including the admonishing of the buyers who believed that the bankers had it right when they most certainly had it wrong.




 Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in the stocks mentioned.




More from

Jun 6, 2012 7:20AM

Its sad that we are almost forced to play the game.  When the goverment drives inflation and rewards tax breaks to get into such a corrupt game, then you know you are in deep chit.


Spend it why you got it.  Don't save your money for the crooks on wall street or the goverment!



Jun 5, 2012 10:55PM






So, Nasdaq is essentially America's "crack dealer in a 1979 Chevy Caprice Bubble House Hooptie" that we see every Saturday night on "Cops."


The Constitution and Bill of Rights are sinking rapidly.  I don't see a life jacket anywhere.



Jun 5, 2012 10:37PM
"Allocations like that show pure greed, typically on the part of the issuer".  No surprise here.  Now the sharks begin to feed on each other.  
Jun 5, 2012 10:28PM
"It was up to the bankers and the execs to figure out a stock price where everyone won. In the end, the little guy got the shaft"  This line says it all.  I hope the small investors learn from this, and leave the "Wall Street Casino".
Jun 5, 2012 7:04PM
Jun 5, 2012 5:19PM
.... well it seems there was a fix on IPO day .... seems like the only real winners were Zuckerburg and his buddies that knew the inside info and bought in low and sold them off when it hit $42+ ..... if you remember that day CNBC reporters were constantly remarking when the prices started going lower than release price, that it was Morgan Stanley that was propping up the market and refusing to allow it to go lower ..... smelled fishy then and now sounds like there was some backroom dealing and possibly criminal activity  ....... hope they nail Zuckerburg and his boys to the wall.
Jun 5, 2012 5:19PM
Be careful Bankers - Obama is launching Drones and he has you on his kill list!
Jun 5, 2012 5:11PM
maybe   FB  stands for flea bag elmo
Jun 5, 2012 4:29PM
FB sold for around $3.53 a share on private equity exchanges in 2010.      

The little guy was a sucker if he bought at $38.  Plain and simple.
Jun 5, 2012 4:28PM
Don't worry Obama will put them all that big jail he said he set aside for brokers and bankers. Do you remember his promise to jail them that he made time and time again, well it should be clear to you now that he is in cahoots with them...the big jail is empty...not a one prosecuted' I hope your not naive enough to believe anything that liar tells up. He comes up empty every time...what a flea bag
Jun 5, 2012 4:26PM

I think FB will hit new lows about every other day for the next 3-4 months.  Once it gets to about $6-9 a share it will stabilize and languish there.  Many people who bought the IPO were greedy by definition, just like the greedy SOBs who handled the transactions and listed their shares to begin the game.  It will be fun watching this collapse!!!  Popcorn anyone?  ;)

Jun 5, 2012 4:09PM




Jun 5, 2012 3:55PM
It was up to the bankers and the execs to figure out a stock price where everyone won. In the end, the little guy got the shaft.

Imagine that!

Jun 5, 2012 3:42PM

Facebook has laid out a clear business strategy for growth:


-Expand the global user community


-Build great social products to increase engagement


-Provide users with the most compelling experience


-Enable developers to build great social products using the Facebook platform


-Improve ad products for advertisers and users


Who markets to 13 year olds? How about breakfast cereals (Kellogg) How about toy companies (Mattel, Toys are Us) How about clothing companies and department stores and smart phones and candy companies and snack foods and book companies and sports equipment companies. Need I go on? AND 13 year olds eventually grow up and will still be using Facebook because they all got started when they were 13.


I bought Facebook because I believe in it's long term prospects for growth. Isn't that the point?

Jun 5, 2012 3:42PM
really is there anyone with a financial background or not that didn't know Fleecebook was just "pie in the sky" phony crap?? I mean who in their right mind actually believed that a site that produced "NOTHING" was worth 2 cents much less 104Billion dollars?? seriously...
Jun 5, 2012 3:40PM
William , my advice is take a look at Elliott Wave International. I joined a year and a half ago and couldn't be happier. They know what they are talking about.
Jun 5, 2012 3:31PM
Never underestimate the power of stupid people in large numbers.
Jun 5, 2012 3:22PM
facebook, like humans, is a temporary glitch in our lives- go to the smaller sites, look for them, they are there- 13 and under should have a better life than typing into a small screen- go out and chase your real dreams- facebook is not fashionable- never was- go bricks and mortar!!!
Jun 5, 2012 3:22PM
I've got nothing against Kramer, I have watched his show a few times and take all his advice with a grain of salt and if I'm interested in the stock he likes, I will do some research.  I have gotten to the point however where I just don't trust anyone anymore.  I have a Morgan Stanley 401k account that I would like to close because I've lost all faith in them, but I'd rather not lock in the losses I currently have.  It sucks but what can you do? 
Jun 5, 2012 3:20PM
BALDY could not call a stock if his life depended on it!
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