Posted on 05/22/2012 4:28:32 AM PDT by SeekAndFind
Matt Levine had a very wonky post on Friday afternoon about the dynamics of the Facebook IPO in general and of the very misunderstood greenshoe option in particular. Now that we’ve all had a nice relaxing weekend, it’s maybe worth revisiting that greenshoe, because it’s actually possible, given Facebook’s tumbling share price today, that Morgan Stanley will make a substantial amount of money on it.
First, it’s worth explaining how the greenshoe option is meant to work. In the IPO, the underwriting banks — there were lots of them, but let’s just call them all “Morgan Stanley”, for simplicity’s sake — sold 484 million shares of Facebook at $38 each. At the same time, they bought 421 million shares of Facebook from the company and its investors, at $37.582 each. The underwriter’s fee of 1.1% is the difference between those two numbers: if you buy at $37.582 and sell at $38, then you end up creaming off 1.1% of the total amount raised.
You’ll note that Morgan Stanley sold more shares than it bought. That’s the greenshoe. When you sell more shares than you buy, you’re short that stock, so when a bank exercises its greenshoe option, as Morgan Stanley did in this case, it is going short the stock in question.
Why would a company like Facebook want its banks to be short its own stock? Partly because when there’s a big short in the market, that provides upward pressure on the share price. Shorts need to cover their short position — which means they need to buy stock. But more generally, the greenshoe is a way to provide the market with a nice extra slug of shares, which everybody wants if the stock trades substantially higher than its IPO price.
(Excerpt) Read more at blogs.reuters.com ...
Were any laws broken? If so then round up the culprits, put them on trial and if guilty lock them up. If not then move along and quit the whining because someone played the game according to the rules and won.
People who are to stupid to understand the risks inherent in the markets and then whine when they lose money REALLY piss me off! Bottom line is don’t bet more then you can afford to lose and when you lose just suck it up and take it like a pro.
Huh? Didn’t know it was possible to ‘short’ an IPO. Live & learn, I guess!
Drudge seemed focused on how bad the stock was performing. I wonder if he was in on this as well.
Read the comments posted at the bottom of the article..it explains a lot...
"He who sells what isn't his'n...
Must buy it back, or go to prison..."
I wonder how many congresscritters were in on this and how much money was involved.
Wouldn’t it be amusing if they lost their a$$e$? Would they be screaming for new regulations to prevent this?
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