Facebook's Scorched Earth
The three goats in this saga -- Facebook(FB) , Morgan Stanley(MS) and Nasdaq(NDAQ) -- will continue the finger-pointing at one another. Ultimately Nasdaq will need to reach quite a bit deeper and come up with more than its opening offer to settle the matter with $13.7 million in cash and $26.3 million in supposed trading-cost rebates.
And then once it finishes with Jamie Dimon and J.P. Morgan(JPM) -- and barely before the water pitchers can be refilled -- Congress will drag that trio of culprits into the same hearing room for the perfunctory upbraiding. After a lecture or two about Wall Street screwing the little guy (again), everyone can go home with the mission accomplished and closure to the matter. Right?
Actually, no. That's not how this one plays out.
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Why? Because the Facebook IPO fiasco has left an unthinkably wide swath of scorched earth in its path. The equity capital markets are badly shaken, confidence is broken and trust has been destroyed. In short, the damage is deep and will be long lasting.
The story of what went wrong has been exhaustively reported, but little has been said about the implications of this epic failure.
Pierpont Morgan famously made loans based on character, not collateral. However, collateral will do just fine -- thank you very much -- for today's investors in bonds.
In the equity markets, trust is everything. Investors trust that management is capable, honest and has interests that are fully aligned with those of stockholders. They trust that corporate governance is sound and that independent directors act in the interest of stockholders. They trust that financial results are reported accurately. Most importantly, participants trust that the market is not a rigged game and that investors have an opportunity to earn returns over time commensurate with the risk that they willingly accept for being at the bottom of the capital structure.