More on Goldman-Facebook deal…

There was recent news on how Goldman had hyped valuation of Facebook.

K@W has  some more discussion on the deal. Just like we saw in Abacus deal, it seems Wall Street is not willing to learn any lessons.

Just to recall in Abacus, there was a dispute over whether Goldman had sold the securities properly. But this was before the crisis and we would believe some lessons should have been learnt. It is disappointing to say – nothing is being learnt.

In the Facebook deal GS has done following:

  • Floated a special purpose vehicle (these dreaded ventures continue..)
  • The SPV raises around USD 1.5 bn from investors. Goldman puts its own capital of USD 450 mn.
  • The money would be invested in FB stock
  • Hence, it is like a mutual fund which invests in only one company’s share – Facebook.

What are the issues with this structure?

It helps Facebook avoid regulations that would require detailed financial and accounting disclosures if it had more than 499 shareholders.

So, GS designs this structure for Facebook and pockets a handsome fees etc. At a time when we are talking about increased disclosures, firms are still designing ways to avoid the law.

Goldman seeing criticism then decided not to offer this to US based investors! It was legal under US law but GS changed tracks fearing SEC investigation.

Read the article for more details.

The deal raises larger questions about Dodd/Frank act:

Simon Johnson, a professor of entrepreneurship at MIT’s Sloan School of Management and former chief economist at the International Monetary Fund, says it is improper for a bank with implicit government backing to be acting like a risk-embracing venture capital fund. “Banks like Goldman have made big mistakes in the past,” Johnson states. “We shouldn’t be encouraging them to take more risk.”

In effect, he says, Goldman is using debt to finance its Facebook investment. It is more appropriate to finance risky ventures with equity, he notes, arguing that equity limits losses to shareholders while debt financing can spread the damage to lenders, including taxpayers. “Whether that would have systemic consequences depends on who holds the debt.”

Assessing the risk is especially hard because Facebook does not have to make detailed disclosures, Johnson notes. “That worries me, and it worries a lot of people.” Allen adds: “They’re taking a lot of risk, but we’re subsidizing them — we, the government. These [kinds of] deals would be priced differently if they weren’t guaranteed by the government.”

Johnson notes that the Dodd-Frank financial reform act passed last year includes the so-called Volker Rule to curb speculative trading by banks. Those rules, however, were watered down at the last minute, and have yet to be written into enforceable regulations and won’t take effect until 2012. At the moment, it is therefore unclear just what constitutes improper proprietary trading, says Allen. “What exactly is proprietary trading?” he asks. “Where are they going to draw the line?”

 For more on how Volcker rule was watered down see this.

Really crazy to see all these developments. All pointing to a need for a much deeper crisis for firms to reform themselves. I don’t think regulation can ever keep pace. Firms have to become more responsible but this is just not happening.

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One Response to “More on Goldman-Facebook deal…”

  1. downloads Says:

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    […]More on Goldman-Facebook deal… « Mostly Economics[…]…

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