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I have to agree on your last point regarding average investors. Hard to have sympathy for anyone who buys something at a certain price and loses money. That b

by jbooth 16y ago

I have to agree on your last point regarding average investors. Hard to have sympathy for anyone who buys something at a certain price and loses money. That being said, it seemed like there were several aspects of "pump and dump", rent-seeking (we can get FB, noone else can, so we charge a totally made-up premium), as well as "make a big transaction at an improper valuation in order to get the inside track with FB's CFO for big fees on other transactions later" to the deal. That's not really how markets are supposed to work.. Meanwhile, it's still damn near impossible to a get a business loan, I hear.

tptacek 16y ago
It has always been damn near impossible to get a business loan. It was damn near impossible to get a line of credit, even for a business with steady cash flow and multiple years track record, in the mid-late 1990s†. Debt financing for IP-driven businesses whose only physical collateral depreciates at near the speed of sound sucks. Don't blame Goldman for that. † Unless the companies I was at that tried were doing something wrong, but, before you whip out the snark, I wasn't the one running those companies.
- yummyfajitas 16y ago
  My local pizza shop bought their oven with a business loan. They bought it from the bank, who had repoed it from another bankrupt pizza shop.
  - tptacek 16y ago
    I can't tell if you're agreeing with me or not, but the differences between the "pizza shop" and "ISP" scenarios are pretty huge even before you get into the credit and business histories of the business owners. Sorry to be a pedant. By the way, curious: how did you find this out? When your pizza place gets a new oven, do you just go ask them about how they financed it? Do you ask these kinds of questions of business owners in general? How do they respond?
    - yummyfajitas 16y ago
      I'm absolutely agreeing with you - I was giving an anecdote explaining why a bank might consider a business loan to purchase a durable good a low risk investment. I don't ask questions like this of that many people, but I'm on friendly terms with my local pizza guy. I'm often his last client of the night. He didn't seem to mind telling me about running a pizza place, at least in broad generalities. On the occasions when I've asked small business owners about such things, they are usually happy to talk about it, provided they aren't busy and don't think I'm a salesman.
      - waterlesscloud 16y ago
        I have these kinds of conversations with small business owners all the time. Businesses I use on a regular basis or one-offs, doesn't seem to matter, they all seem to be willing to talk how how things are.
- jbooth 16y ago
  I'm not blaming Goldman specifically for that, but I am blaming the whole financial industry. They spend huge amounts of resources pursuing zero-sum games like this, or obfuscatory games like the mortgage thing and, it seems to me, they haven't gotten any better at actually routing money to where it creates value (their purported raison d'etre) since the 1980s. Instead we just see more and more sophisticated games. I mean, I guess that's where the money is, so shame on us.
  - tptacek 16y ago
    What specifically could Goldman do to reduce the risk to a bank of lending money to a small business that will be spent mostly on salaries and (in the balance) on equipment that will be worth 1/10th its purchase price if they need to call in collateral? Businesses are risky. That's why companies finance with equity.
yummyfajitas 16y ago
I agree with you, a more public process for creating liquidity in stock would be great. Unfortunately, while Sarbox may have prevented another Enron/Worldcom, it also prevented/delayed the Facebook IPO. (Interestingly, that's exactly what assorted limited government crackpots were worried about back when Sarbox was passed.)
- jbooth 16y ago
  Eh, putting it on sarbox reminds me of the attempts to blame the mortgage meltdown on Fannie Mae. Way, way too ideologically convenient. I mean, they just picked up 500 mil, I think they could find the resources to do a little extra accounting, even if you're contending that it's an unnecessary burden. Everything that I can see (as an outsider) about FB's corporate DNA tells me what they want to stay private for as long as possible regardless of whether it costs them an extra 100k in accounting to go public. I mean, they just picked up 500 million. I bet they could scratch up the money to bring in Accenture and have them do a bunch of excel sheets once a year. I don't really have any solutions, here, aside from some ill-conceived and emotionally satisfying proclamations of "destroy the IPO underwriting industry!". I'm just noticing that, if things are working the way the article says they are, it seems like Goldman's job in this case is all about creating exclusive deals and making insider connections, and very little of it is about evaluating Facebook's proper worth. Although maybe they think they're making a value investment. Who knows.
  - yummyfajitas 16y ago
    It's well known that Zuckerberg wants to keep secret much of the information that Sarbox (and various other rules affecting public companies) would require him to release. I'm sure Facebook could afford several million/year on Sarbox compliance. But what is the benefit to them? As you said, connected insiders (such as Zuckerberg and Goldman's clients) are doing just fine with Facebook remaining private. So why bother with the hassle of Sarbox, potential minority shareholder lawsuits, and liquid markets that might go down more quickly than the current illiquid one?
    - 16y ago

by jbooth 16y ago

tptacek 16y ago

It has always been damn near impossible to get a business loan. It was damn near impossible to get a line of credit, even for a business with steady cash flow and multiple years track record, in the mid-late 1990s†. Debt financing for IP-driven businesses whose only physical collateral depreciates at near the speed of sound sucks. Don't blame Goldman for that. † Unless the companies I was at that tried were doing something wrong, but, before you whip out the snark, I wasn't the one running those companies.

yummyfajitas 16y ago
My local pizza shop bought their oven with a business loan. They bought it from the bank, who had repoed it from another bankrupt pizza shop.
- tptacek 16y ago
  I can't tell if you're agreeing with me or not, but the differences between the "pizza shop" and "ISP" scenarios are pretty huge even before you get into the credit and business histories of the business owners. Sorry to be a pedant. By the way, curious: how did you find this out? When your pizza place gets a new oven, do you just go ask them about how they financed it? Do you ask these kinds of questions of business owners in general? How do they respond?
  - yummyfajitas 16y ago
    I'm absolutely agreeing with you - I was giving an anecdote explaining why a bank might consider a business loan to purchase a durable good a low risk investment. I don't ask questions like this of that many people, but I'm on friendly terms with my local pizza guy. I'm often his last client of the night. He didn't seem to mind telling me about running a pizza place, at least in broad generalities. On the occasions when I've asked small business owners about such things, they are usually happy to talk about it, provided they aren't busy and don't think I'm a salesman.
    - waterlesscloud 16y ago
      I have these kinds of conversations with small business owners all the time. Businesses I use on a regular basis or one-offs, doesn't seem to matter, they all seem to be willing to talk how how things are.
jbooth 16y ago
I'm not blaming Goldman specifically for that, but I am blaming the whole financial industry. They spend huge amounts of resources pursuing zero-sum games like this, or obfuscatory games like the mortgage thing and, it seems to me, they haven't gotten any better at actually routing money to where it creates value (their purported raison d'etre) since the 1980s. Instead we just see more and more sophisticated games. I mean, I guess that's where the money is, so shame on us.
- tptacek 16y ago
  What specifically could Goldman do to reduce the risk to a bank of lending money to a small business that will be spent mostly on salaries and (in the balance) on equipment that will be worth 1/10th its purchase price if they need to call in collateral? Businesses are risky. That's why companies finance with equity.

yummyfajitas 16y ago

I agree with you, a more public process for creating liquidity in stock would be great. Unfortunately, while Sarbox may have prevented another Enron/Worldcom, it also prevented/delayed the Facebook IPO. (Interestingly, that's exactly what assorted limited government crackpots were worried about back when Sarbox was passed.)

jbooth 16y ago
Eh, putting it on sarbox reminds me of the attempts to blame the mortgage meltdown on Fannie Mae. Way, way too ideologically convenient. I mean, they just picked up 500 mil, I think they could find the resources to do a little extra accounting, even if you're contending that it's an unnecessary burden. Everything that I can see (as an outsider) about FB's corporate DNA tells me what they want to stay private for as long as possible regardless of whether it costs them an extra 100k in accounting to go public. I mean, they just picked up 500 million. I bet they could scratch up the money to bring in Accenture and have them do a bunch of excel sheets once a year. I don't really have any solutions, here, aside from some ill-conceived and emotionally satisfying proclamations of "destroy the IPO underwriting industry!". I'm just noticing that, if things are working the way the article says they are, it seems like Goldman's job in this case is all about creating exclusive deals and making insider connections, and very little of it is about evaluating Facebook's proper worth. Although maybe they think they're making a value investment. Who knows.
- yummyfajitas 16y ago
  It's well known that Zuckerberg wants to keep secret much of the information that Sarbox (and various other rules affecting public companies) would require him to release. I'm sure Facebook could afford several million/year on Sarbox compliance. But what is the benefit to them? As you said, connected insiders (such as Zuckerberg and Goldman's clients) are doing just fine with Facebook remaining private. So why bother with the hassle of Sarbox, potential minority shareholder lawsuits, and liquid markets that might go down more quickly than the current illiquid one?
  - 16y ago