Category: Political Science & Economics

Facebook’s IPO Confirms the New Role for Capital Markets

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Many are calling Facebook’s IPO a bust because it didn’t pop on the first day.  Others are decrying the fact that Facebook “took all the profits for themselves” at the expense of individual investors.  Facebook’s stock may or may not be overvalued (I think it is, by a lot), but calling it a bust and complaining that retail investors aren’t making the profits they are “entitled to” is ridiculous and misses the larger point.  For example, in a Forbes article titled 7 Reasons Why the Facebook IPO was a Bust, Rich Karlgaard writes:

Facebook left nothing for the common investor. The insider pig pile of PE firms and celebrity Silicon Valley angels took it all. This is a rather new, post-Sarbanes-Oxley fact and it should make Americans very, very angry. When Microsoft when public in 1986, its market value was $780 million. Microsoft’s market value would rise more than 700 times in the next 13 years.Bill Gates made millionaires of thousands of ordinary public investors. When Google went public in 2004 at a $23 billion valuation, it left less on the table for you and me. Still, if you had invested in Google then and held your stock, you would be sitting atop a 9x return. Zuckerberg and his Facebook friends took it all.

That Facebook and its investors acted in its self interest shouldn’t be surprising and it shouldn’t make people mad.  They have no responsibility to the average Joe clamoring for a quick buck by purchasing Facebook stock.  Zuckerberg and his team are thinking “The average investor hasn’t done anything, they didn’t take any risks like our previous investors, they just want to piggyback onto our gains.  They’re greedy.”

Facebook sold its private stock at the highest valuation they could, which brought Facebook and its previous investors the most cash possible.  It was as if they were selling their company to the public, not opening it as a great investment opportunity.  They viewed the new shareholders as suckers, not partners.

With the advent of private equity in the 80s and its explosive growth into the 2000s, the pension funds and institutional investors have gotten more creative and powerful.  They invest earlier and in huge amounts, into the multi-billions.  The only people who can’t get early exposure are the regular joes who “play the market.”  Its now a casino and the game is rigged.  Facebook, the banks and the press sold the story using the old narrative, instead of the new role of public capital markets.

Facebook’s IPO shows this new role.  In a private equity driven, post Sarbannes Oxley world, the returns are getting shifted to those who took the initial risk, not retail investors.  These initial investors are playing a game of musical chairs and retail investors are the last stop, the last idiots to buy into the game.  It’s rigged so that the retail investors don’t have a seat if (when) the music stops.  And it’s purposely designed that way.

What Facebook, its investors and the banks did isn’t new.  It’s just the latest example.  Groupon did the same thing, but worse.  Months before they went public they took a series G round valued just shy of $1b.  The founders and investors took $810m off the table and put it in their pockets. The new investors not only allowed this, they did so enthusiastically because they knew that Groupon would go public at a higher price and the “stupid” general public would be left holding the bag when the price inevitably fell.  Groupon is now down 54% from it’s IPO price.

Retail investors should not be mad at Facebook for acting in its self interest and raising as much money as possible.  Retail investors should be pissed at the banks who hyped Facebook as the next great investment opportunity and the press who bought into the hype and the outdated narrative.  They should be pissed at additional government regulation that makes it hard for companies to go public earlier and leaves more gains for private equity.  Anyone who bothered to look at Facebook and Groupon’s previous private rounds and private sales on Secondmarket would have been able to see this coming.

It’s the new normal. Tech companies don’t use the stock market as an efficient way to raise capital like it was intended. It’s a way to cash out previous rounds and leave potential losses with the general public. It’s one giant casino with the public as suckers.  This farce will only stop when retail investors realize that tech IPOs are a loser for most of the general public or refuse to play in the casino…er stock market.

The US Economy Needs Chemo

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There are two huge trends affecting the world economy.  First, the world is going through the biggest economic shift since the industrial revolution.  New technology is changing every industry and it’s happening fast.

Second, the enormous credit expansion that has fueled the world economy since World War II is beginning to topple over.  It’s taking ever more debt to marginally increase our GDP.  These two macro trends are causing our economic chaos.

The US economy has cancer.  Government and personal debt are massive.  They are unpayable without monetizing the debt or in plain English, printing money.  Unemployment is at record levels and the lowest amount of working age people are in the workforce in decades.  Our government isn’t functioning well.  The stock market is recovering as the Fed prints money, but main street is suffering.

The Democrats under the direction of Barack Obama believe that we can spend our way out of our problems. They believe that if we simply print more money and put it into the economy, we’ll revive the economy and everything will take care of itself.  That’s why they passed the stimulus and believe its best to keep interest rates at nearly zero.  If all else fails, start the printing presses!  The vast majority of the trillions of dollars that have been printed have going into consumption, which doesn’t help the economy long term.

That’s the road to inflation, or hyperinflation.  To me, that’s like a doctor saying, “yeah, you’ve got cancer, just take these pain pills, drink some alcohol and live the good life and things will get better.”  In reality, you might not feel the pain by continuing your behavior, but in the long run, you’re gonna die.  But hey, we postponed the pain as long as possible.

The Republicans believe that the debt is the problem.  They believe that if we cut spending, balance the budget and get out of debt, everything will be ok.  That’s suicidal.  If we just cut, cut, cut, we’ll go into depression.  Their cancer cure is to hack off the offending body part, without anesthesia, in the middle of the forest with a dull instrument.

The Democrat’s plan will burn us to death in the long run via inflation, while the Republican’s plan will freeze us to death with huge recessions, if not depression.  There is a third way, but I believe both sides are too partisan to take it.

Instead of treating our economic cancer with alcohol and painkillers (printing money), or chopping off our leg in the middle of the forrest (austerity), we need chemotherapy (targeted reforms).  We need specific medicine that will actually have a chance of working.  The US’s economic cancer is fairly advanced, so even targeted remedies may not work, but it’s at least worth a try.

Instead of actually looking for targeted solutions, or taking a bit from both sides, both parties continue to toe the “either/or party lines” of “we can spend our way out of it” or “we can cut our way out of it.”  But it’s not bipartisanship.  It’s a third way.

So what is the third way?  It’s realizing that while we do need to shrink government, its not about just cutting monetary outflows.  It’s about cutting the money that’s printed and then put into consumption.  We need to be investing in projects that will actually net a positive return.  We don’t need more consumption.  We need infrastructure, investment in new technologies and education.  We don’t need spending, pork projects and transfer payments.  We need high speed Internet everywhere.  We need better transportation. Better schools.

The cuts come in spending cuts, while we increase investment. We need a new roof on our house, not a trip to the Carribbean.  Spending on consumption won’t work.  Draconian cuts won’t work.  It has to be investment. The only way it happens is if we demand it. We have to start now. We have a 7-10 year window to really get started and give it our best shot.

I Don’t Want Bipartisanship

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My post a few weeks ago on Why I’ll vote for Obama in November was one of top five most popular posts I’ve ever written in terms of traffic.  I got tons of feedback in the comments, on Twitter, Facebook, via email and even some phone calls.  Most was positive, but some was very negative.  I realized I didn’t explain what I wanted in a politician well enough and that there were many misconceptions about bipartisanship and my solution to the problem.

Even though I don’t agree with much of what Obama has done and believe he’s been a bad president, I’m going to vote for him because he has the biggest chance to actually push for the big changes that we need and the current Republicans are a disaster. If he wins, he won’t do much more damage and might actually make change.  If not, we give the Republicans a second chance to come up with a potential game changing candidate.

Lots of people felt the same, but others disagreed vehemently, either supporting Obama’s agenda or saying that the Republicans had it right.  Many wished for more bipartisanship.  I don’t want bipartisanship as we’ve come to know it today.  The current definition is one side comes up with a proposal, the other side says they don’t like it, puts in a few recommendations and we pass a watered down bill that doesn’t actually change anything.

That’s not what we need. Bipartisainship used to work because each party had big ideas that they believed in, but individual politicians were allowed to have their own opinions on the rest of the issues.  Both parties were “big tents” where everyone generally agreed on the big issues, but smaller issues were left up to the politician’s good judgement.

Republicans used to believe in small government, a strict interpretation of the Constitution and generally conservative attitudes, but the individual members could stake out other “liberal” positions on tax policy, social issues, environmental protection and many others.  Democrats used to believe in larger government and a more fluid interpretation of the Constitution, but could take all sorts of other more conservative positions on individual issues.

Now, to be a successful politician, you have to be monolithic in support of your party.  You have to be lock step with them you’ll draw the ire of the party activists.  You must agree on everything or you’re voted out.  Because of jerrymandering in the House, we get more and more “true believers.” Joe Lieberman was basically kicked out of the Democratic party because he sided with the Republicans on Israel and defense.  The independent minded Republicans have all been voted out. Both parties have become irrationally tied to their positions, co-opted by hyper partisan politics instead of making things better.

I do not want bipartisanship.  I don’t want a president who leads from the right or from the left. I want someone with an independent mind.  Someone who can for example support a simplified tax code, a new look at the drug war, cutting the defense budget, a look at the prison industrial complex, civil rights and investment, not spending.  Someone to take the best from the Republicans and the best from the Democrats ad go for it.

That’s how we get out of this mess.  We don’t need compromise, we need someone who is willing to break away from working in lockstep with a party.  Someone who recognizes a good idea when they see it and throws their support behind it.  We need a rejection of both party’s lock step agenda.  We need to reject the idea of bipartisanship in its current definition and break the lockstep grasp that both extreme wings of each political party has on our country.

Why I will Vote for Obama in November

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I am going to vote for Barack Obama this November, but not for the reasons most people will.  I didn’t last time.  I didn’t vote for McCain either.

I believe that Barack Obama has been a bad President.  He has shown little to no leadership, lack of backbone, a poor grasp of economics and has been in constant reelection mode since his inauguration.  He’s made a bit of progress, but hasn’t proposed real solutions to any of the big issues.  He’s spent huge amounts of money and continued to run up debt.  And before you say it’s the evil Republicans’ fault, Obama had a filibuster proof majority in both houses for a year and a half and still couldn’t get things done.

During Obama’s term, he passed health care reform, but only went half way.  Instead of leading, he outsourced all of the hard work to the very unpopular Harry Reid and Nancy Pelosi.  Whether you agree with Medicare for all or not, Obama could have passed it if he wanted to.  He also could have tried to push for fixing the root of the problem: that healthcare is based on use, rather than outcomes.  Instead we got Obamacare.

Guantanamo Bay is still open.  Even worse, Obama has presided over some of the largest erosions in our civil liberties in recent history, many of which are unconstitutional.  He signed a law that allows US citizens to be detained indefinitely in Guantanamo without a warrant, a trial or due process.  He’s authorized the assassination of US citizens who “support terrorism.”  He intervened in Libya and is thinking about it in Syria.

His TSA has introduced naked body scanners, pat downs of little kids and the elderly and is thinking about adding random TSA checkpoints complete with scans for cars on the highway!  The Orwellian “if you see something say something” is coming out of Obama’s government.  To not appear weak on terrorism, Obama has allowed all of this to happen under his watch.  If a Republican had been in office, the left would be HOWLING, but since Obama is a compatriot, the criticism in muted.

Obama’s justice department and SEC have let Wall Street do as they please, presiding over huge bailouts while leaving mainstreet to pick up the pieces on its own.  His administration has kicked the can down the road in just about every aspect of government, preferring to do the safe, hopefully crowd pleasing move rather than actually lead.  Afghanistan is still raging and seems to be getting worse by the day.  Our spending is out of control and our debt situation will be like Greece or Spain if interest rates ever rise.  To me, his biggest success is that he’s gotten us out of Iraq.

So all of that said, why am I going to vote for Obama in November?  Because since about 2008, the Republicans have been an unmitigated disaster.  They’ve pushed out the moderates and become the party of fear.  They’ve become anti-intellectual and incredibly social conservative.  Instead of a primary, they’re hosting an old school Christian religious revival, looking for other people to blame.  Illegal immigrants, Barack Obama, Islam, gays, college students…”others.”  This is a very very dangerous path to go down.

That Santorum, a guy who lost his home state by 18% points a few years ago, and Gingrich, who was thrown out of the House of Representatives for ethics violations, are mainstream and winning states in primaries is shocking.  Republicans are selling old policies, fear and religion.  Many have much more in common with the Islamist fundamentalists than they would ever like to believe.  They’ve started a war on contraception, gay rights and morality.  We have candidates that say with a straight face that the devil is attacking the US and that we shouldn’t have a separation of church and state.  We have states that are requiring candidates to sign anti-premarital sex pledges.

Unless something crazy happens, Romney will face off again Obama for the Presidency.  He is more moderate than the other Republican candidates, but he’s decided to practice the anti intellectual, pro Christian, politics of fear that the rest of the candidates are using to try to win the Republican nomination.  I don’t think Romney has much to offer as a President.  I admire the work he did with the Salt Lake City Olympics, but I don’t think he will actually make the big changes we need to save the US.  He’s not a transformational leader.

He’ll make some changes, while trying to get reelected in four more years.  We don’t need that.  We need a leader, someone comfortable saying that we need big changes and actually implementing them.  Someone who’s willing to go after vested interests on both sides and tackle our long term problems.

Romney won’t do it.  He’s going to try to get reelected.  And I have no idea what he really stands for.  I had hope for Obama, but instead he focused on getting reelected and staying popular.  Maybe as a lame duck he will find his convictions?

Probably not.  Obama will likely stay on the same path.  But there’s a 10% chance he says “fuck it, I’m going to do it my way” and actually lead.  We need motivation, inspiration, an “ask not what your country can do for you” moment.  Someone who will not be beholden to vested interests to take on the military industrial-Wall street complex, plus social security, health care and our national debt.

I’m fiscally conservative and socially liberal.  I don’t agree with Obama economically on the vast majority of issues.  But I’m going to vote for him because Romney and the Republicans are going down a road that I find despicable and don’t think they are the transformational leaders we need. I’d rather take the small chance that Obama can be  a game changer, because I don’t think he can really do much worse of a job.  We’re already beyond the point of no return for spending/reform, so any extra spending Obama does wont really hurt much, it’ll just make our day of reckoning a bit sooner.  His lame duck status might actually help him lead because he won’t have to worry about reelection.  Romney will.

In short, if Obama wins, he might do what he said he would in his first campaign.  If he doesn’t he can’t hurt much more than he has.  And it clears the way for potentially transformative Republican candidates to run in four years.  People like Mitch Daniels and Chris Christie or other potentially game changing figures.  If Romney wins, we’ll be stuck with him as the Republican candidate for the next 8 years.  We need a huge change and Obama is our best choice.  For now.

What do you think?