President Obama must be in a bit of a quandary whether to say anything about the new round of recent screw-ups in our biggest bank/investment houses. He needs their money for his Super PAC, and this time around, it's going to be harder to win them over, but it must be so tempting--and fitting with his Romney-bashing attacks on "vulture capitalism" (Rick Perry's phrase referring to Romney's business activity, to be fair), to say something topical and incisive about J.P. Morgan Chase's so-stupid-it's-almost-criminal screw-up and the gross inequity around the Facebook IPO. It's probably better if one of his surrogates connect the Wall Street dots and put Mitt in the center of the box.
The Leviathan, Beached
As I read somewhere, and the writer was correct, Jamie Dimon of JPM-Chase "had a good crisis"--of the major banks, his came out of the 2008-09 disaster looking the best. Morgan/Chase swallowed up a failed mortgage company, Washington Mutual, but did not choke on it (like Bank of America did with Countrywide), and it repaid its TARP money fairly quickly and resumed profitability. Dimon had been a major critic of Dodd-Frank "over-regulation" and of the "Volcker Rule", which was designed to prevent big banks like Dimon's from taking big chances with its funds.
Then, three weeks ago, Dimon had to eat his big words. His trading office in London had run huge trading positions (so large, their trader was internally referred to as "the Whale"), supposedly hedging against possible investment losses with the company's capital, but these turned sour and he had to acknowledge some $2 billion in losses (the number has since grown, and the company has compounded its errors by selling too many of its profitable holdings to help maintain the profit record). Dimon survived bitter shareholders' attempts to get even and reduce his compensation or remove him as chairman, but the aura of professional competence he had cultivated over decades is pretty badly shot, as is his argument that the big banks don't need such restrictions.
In fact, the Volcker Rule is not yet finalized, let alone effective (that would be a couple years down the line, to allow a transition), but JPM's maneuvers apparently would not even have violated it--in the form legislated, banks were allowed to "hedge" with such poisonous concoctions.
My conclusion is that these big, ugly monsters are "too big to manage"--basically Dimon admitted that he didn't know what they were up to in London, even though formal approvals are on record. Chase, Citi, and B of A should be broken up into two large shards each: a commercial/investment bank--allowed to have trading operations houses and trade for its own account--and an international consumer bank, which, because of the FDIC insured deposits and brokerage/mutual fund operations, should not. One would be high risk/high return, the other would be very large, with more predictable, though cyclical, profitability. The alternative would be to require penalty-level FDIC premiums and Tier 1 capital requirements at such high levels that the big monsters would choose on their own to split up.
Facebook's IPO: Should the Deal Have Been Face Down?
Facebook's stock was over-hyped, over-distributed, and over-sold, but worst, it was privately trashed by its lead managers to key institutional investors in the days prior to the Initial Public Offering (or in this case, it should be called "Insiders Peddle Offal"). With IPO's, especially tech stocks, we are used to the hype, the excessive number of shares offered, the price being unsustainably high, but we still expect that the lucky ones holding the shares on Day 0 will be able to take profits on Day 1 (unless they are blocked from doing so). There was a period of a few hours when it was up from the initial price, but it didn't last through the first day, and has gone down since. So, a few who got the secret word--that Facebook's future revenues will not be all they were cracked up to be--managed to dodge a bullet. I hope they're grateful.
CEO James Gorman of the lead investment bank Morgan Stanley has been quoted this week as saying that investors who expected Facebook to rise were "naive". He is right, but I would classify his comment as defecation in the same place he feeds. I don't think there will ever be another IPO of this magnitude; from now on, there will be the semi-public offerings to insiders, but the mass offerings are a thing of the past: having been bitten, the public won't bite.
There will be ramifications for Morgan Stanley, or for others who may have provided information that was not publicly distributed. I'm sure Mark Zuckerberg has reason for litigation against those who were supposed to be serving his interests; dozens or hundreds of second-stage investors (after the venture capitalists, before the IPO) got the shaft and will be looking for revenge.
That Facebook's business model is a bit lacking is not too surprising, though. It's not a place to go shopping; and the curse of the Internet is that those who use it most are basically just looking for what they can get for free. Still, I figure any medium that has access to some 1 billion eyeballs has to have some value; the question is what that should be. Not the IPO per share offered price, though; that was the truth that was not dealt out face up, which is what the "public offering" part is supposed to require.