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 5, 2012 11:46AM

What a Worthless Company facebook is...

Wanting  to sell your kids personal info and profiles for money...

This is one company, I would LOVE to see go broke..!

Jun 5, 2012 10:41AM

Seriously, people please think about this.


There is NO reason for ANYONE of any age to be on a (non) social network like facebook or twitter.  It's a total waste of time and productivity.  It also makes you a LESS social human being.  Go visit someone in person, or pick up the phone like in the old days (ha). 


It's pathetic that anyone under 30 won't talk to people.  All they want to do is email and text.  What ever happened to handshakes and eye contact?  REAL friends! 


Can we all use some common sense and realize we don't need to be tapping on i phones 24/7 and all this busy work and information sharing that the big companies, and government would love for us to fall in line and do?   DISCONNECT people, it's time to wake up!

Jun 5, 2012 2:56PM
Facebook is nothing but a girly-gossipy-worthless website. This company does not contribute to real GDP of the country. Young kids should keep their faces away from Facebook and keep their faces in real books (education).
Jun 5, 2012 10:08AM

Issues like this and crooks like Morgan Stanley are why the Retail investor will continue to stay away from the market.

I still want to know why YOU and the rest of the talking heads at CNBC were so excited about the FB IPO and touting it as the start of the next tech rally.

You just seem to change sides on things a little too much to be believable about anything Jim.




Jun 5, 2012 12:46PM


Vegas is more fun.  The drinks are free.




"Morgan Stanley's biggest clients" - translation - Congress.



Jun 5, 2012 11:45AM
I have to wonder if the only honest player in this whole mess was GM. When they announced withdrawal of advertising dollars from FB, what further due diligence did I need?
Jun 5, 2012 10:28AM
YOU are BETTER off to live WITHOUT FB !

and now the thought of 13 yr  and younger on it!

Jun 5, 2012 12:00PM
I know it looks as though these biggety folks got away away with murder, but rest assured, what goes up must come down. These folks have and are systematically killing any trust that may have garnered since the they were severely punished 80+ years ago. It takes a very long time to regain any trust from customers once you've lied, stolen, misrepresented, etc. I was raised by a woman who was born in 1909 and died in 1994, and I always thought growing up that she out of touch, very distrustful, etc..... But now it's playing out right before my eyes, I see why she was the way she was. She did not trust a banker or financial person any further than she could pick them up and throw them. She did put some money in C.D.s, etc, but watched it like a hawk watching a chicken. Whenever she wanted to buy a car, remodel the house, etc..., she went into a hat box in her closet and if she had to finance it, she felt like she didn't need it. Sound like your Grandparents? These folks are working themselves into the same corner that bankers two generations ago did. Listen up you untouchables!  Best advice you'll ever get in a lifetime, and I won't charge you a dime for it. History has a way of repeating itself. BEWARE! Most if not all of the old guard have passed or soon will be gone, but you're breeding a new group of watchdogs with dirty rotten tricks and lies. This is exactly why these folks plunder the way they do, because a generation or two ago they would have spotted these a-holes right out of the gate, and they would have never been allowed to dupe anyone other than the totally ignorant. Last word to the bankers: You reap what you sow!
Jun 5, 2012 12:06PM
Facebook is only for information purpose. People do not go on facebook to buy products. They
go on fb to gossip, find out what is going on in other peoples lives, post private and not so private pictures, put there lives out there, block people they do not like. There is no money to be made on
facebook. No one was mislead, no one was pushed to buy stock. The media made a frenzie out of the situation and people jumped on it and now there realizing it ain't working now and it ain't going to work! You do not need a financial advisor for that information. It's priceless!!

Jun 5, 2012 10:06AM

I still don't understand the amount of self-delusion it took to buy into the Zuckerberg fantasy.  FB has only one resource, the data it has encouraged its users to divulge.  Given the inaccuracy of that data and the mountain of outright lies told on FB, advertisers are increasingly silly to deal with FB.  Especially after repeated surveys show that only a paltry number of users even click on the ads, some only in error. 


Now the big Z is going after pre-teens?  Probably without any more privacy than he gives adults.  Sounds like desperation to me.

Jun 5, 2012 10:15AM

Good article. It all smacks of Facebook’s core philosophy towards it customers too. No wonder Wall Street loves them so much. This latest controversy over letting the 13 and under crowd sign up for Facebook is just another example of it. It’s being pitched by Facebook as a genuine concern of theirs, like they want to do the right thing. All they are really trying to do is evaluate if they can get away with it without pissing people off too much. Why? Because they want to that’s why. They want to capture the minds of their users at the earliest possible age, when it’s easiest to manipulate them. In the end, that’s all that really matters to Facebook; to channel as many people as possible into their virtual world under their control by any means necessary. What next; are they going to lobby all the hospitals to allow them to flash their logo ten times in the face of every newborn the first time they open their eyes. There will be plenty of time for the baby’s to see their mother later; you know, on Facebook.

Jun 5, 2012 10:16AM

How long until this is a penny stock?  LOL  


Actually, I think it's probably worth a PE of 10 to 15... but when Zuckerberg starts buying back at $5 a share, then many might see the light of this sham!

Jun 5, 2012 10:42AM

What did people expect?  Facebook is the embodiment of our narcissistic culture.  The company neither makes nor services anything.  Why would a rational person invest in that?


The formula for the individual to make money in the stock market hasn't changed.  Systematic investments each month (dollar cost averaging), max out your 401k (a 30% return just on the tax savings), dividend paying stocks (not sexy, but they do pay), don't try to beat the market.

Jun 5, 2012 2:38PM
The little guy got screwed, again, who'd a thought. At least this time it wasn't me and it won't be me next time either. Wall St can KISS MY A$$ until we see something like Glass - Steagall or some other form of oversight besides the "self-regulation" that has worked so well for the last 15 years.
Jun 5, 2012 10:52AM
Thanks for telling us something we already know. The game is rigged.
Jun 5, 2012 12:45PM

is this the same bald head that recommended that everyone should get some FB stock?


I think so...


Nice fan club you have mr. Cramer!

Jun 5, 2012 12:06PM
My biggest worry is what this is going to do to the thinking of the large mass of people who already distrust the stock market.  They are going to be even LESS likely to get into the markets in the future, thus providing even less liquidity,
Jun 5, 2012 3:31PM
Never underestimate the power of stupid people in large numbers.
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 10:34AM
Does any of the blame go to touts who promoted the stock, Jim?
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