Facebook IPO may have cost banks a bundle

Facebook’s underwriters may have sacrificed a big chunk of their own profit – to the tune of $66 million – in a desperate battle to keep the stock from sinking below its IPO price on its first day of trading last May.

That’s the conclusion of some economists at the Federal Reserve Bank of New York,  who examined trading patterns on May 18, when Facebook’s stock debuted. Thomas Eisenbach, David Lucca and Karen Shen outlined their findings in a blog post this week. (The blog is down now – a temporary casualty of Hurricane Sandy? – but a cached copy can be found here.)

In the weeks after the IPO, the stock sank far below the IPO price of $38 and has never fully recovered. But the Fed economists provide an interesting glimpse into the drama of May 18, when Facebook’s record-setting IPO opened to much hype and quickly showed signs of fizzling. The stock ultimately closed at $38.23, just a hair  above the IPO price. Many investors and observers were disappointed that there wasn’t more of a “pop,” but insiders noted at the time that it looked like the underwriters – led by Morgan Stanley – had taken desperate measures to avoid the humiliation of seeing the stock close at less than $38 on that first day.

The economists found two points during the day when unusually large volumes of offers to buy were placed just as the price appeared to be on the verge of going below $38. In both cases – including one that occurred just half an hour before the market closed – those offers helped reverse the slide.

While the people placing the orders were never identified, the economists infer that the underwriters were the only likely parties to be doing so. They also estimate that the underwriters may have sacrificed as much as 40 percent of their potential profit from the trading that day. “If this estimate is correct,” they write, “underwriters’ reputational concerns and obligations to the firm may have outweighted their short-run profit motive.”

UPDATE: Dealbreaker’s Matt Levine offers a different analysis here. He also cites earlier reporting, based on unnamed sources, that said the underwriters made $100 million from their efforts to stabilize the price. So …  that’s why they call it “high finance.”


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