Another Word About the Shady Facebook Deal

Since The Daily Beast posted my article about the Facebook deal being similar to subprime CDOs, I've had some interesting email responses. They fall into three main categories (I'm paraphrasing here):

1) You are so far off-base with the subprime CDO comparison, it's hilarious, you idiot.

2) Who cares if Goldman's wealthy clients wanted to buy in? That's their problem.

3) Thanks for pointing out the obvious, we've been down this road before -  where the next great thing, turns out - not to be.

I'll start with (1);

Yes, a private deal to raise capital through offering shares in a private company does not have the identical nuts and bolts framework of the more complicated, CDO. BUT,  in this particular deal, there is uncomfortable secrecy surrounding the ASSUMPTIONs that are being used to evaluate Facebook at 5 times what is was valued at last year, even though its viewer count hasn't risen remotely by a factor of 5 during that time. According to Quantcast,  traffic has doubled over the past year, but the increase has slowed down relative to the period between 2008 and 2009. CDO's were stuffed not just with subprime loans and related assets, but with characterizations on those loans that were a secret to most investors and turned out to wildly off-base. The Facebook deal has that flavor. If it was just one deal, then the potential negative effect would be lower, but where Facebook and Goldman go, many like deals will follow - private issuance, off-shore investment vehicles, credit and other equity derivative baskets, etc. I am looking at this bigger picture of a 'hot' sector.

As for (2): 

The market as a whole, is too interconnected to allow for the separation of the set of actions or investment choices of one group, from the broader arena. If the values of not just Facebook, but scores of similar deals, are severely inflated, it will be because, in the short term, there is an investment-bank validated belief that its eyeballs and related advertisement fees can only rise. (The whole belief behind subprime CDOs and the related shuffle game, was that home prices could only rise, which would substantiate the belief that defaults would remain low.) If it turns out that this Facebook belief does not materialize, anyone who bought into the hype initially, or at a later point, will be impacted, not just the high net worth people, but the pension funds that put their money into investing hedge fund managers, the others forms of retirement and college funds that did the same, and down the line. Recall, US subprime CDO's brought down a town in Iceland. And aside from that, our government bailout out a whole Ponzi scheme of passing the product, and the derivatives associated with that product, along a giant risk pyramid that I examine in Pillage. Only $2 trillion of CDOs was issued during the 6 years leading up to the 2008 financial crisis, yet far more devastation was realized as a result.

With respect to (3):

It is of course possible, that Facebook will be the most popular social network site for the next several years, attracting the most amount of advertising dollars per eyeballs, and all the other sites that are contemplating a similar private (as in information-lite) deal will also enjoy the same trajectory. I mean, Myspace was considered to be the be-all-end-all a few years ago and ..... exactly. But, if you take a look at the video advertising figures for Facebook and other leading sites, the ratio of Goldman's evaluation of Facebook to the market caps of some of its competitors to the unique viewers to the minutes viewed of advertising video, Facebook has a long way to go to break even. And, that's not even counting the fact that other sites, as yet not on the 'social media map' might come into play - that's a lot of dispersion for advertisers to think about when they dole out their dollars. All of which means, that by the time 2013 rolls around, we could be seeing a severe deflation of values across the social-media space, which could have a negative knock-on effect throughout the market and economy - in a repeat of  the what goes up fast, comes down hard - scenario.

Comments

[sgt_doom]

I completely agree with your article, and would consider Facebook to have a short shelf life in any event, but consider the more insidious implications of this: that it fits in with the societal information systems acquisition trend among the banksters (I would bet this originated in GS's Business Intelligence Group).

I have noted in the past Goldman Sachs' former DoD employee, Jeffrey Starr (mentioned in that poorly written, and even more poorly researched and nonsensical book, Broker, Trader, Lawyer, Spy -- not urging anyone to buy it) who went on to a Goldman Sachs investment property, G4S (formerly G4S Wackenhut) involved with the privatization of police, court systems, etc., the world over.

This appears to follow a trend postulated at a DoD subsidiary (I'm being sarcastic, but for all intents and purposes they are), Arizona State University.

They may hope to harvest financial intel from those various societal information systems' sources, although it appears tenuous to the rest of us. At any rate, it affords them a modicum of control in the public relations and "manufactured consent" realm.