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Facebook and Wall Street's Inside Game

David Callahan

It's too early to say whether serious misdeeds were committed by Facebook or its Wall Street underwriters in the lead up to its IPO. Or whether, instead, this was a case of miscommunication and incompetence. Regulators and litigators will eventually get to the bottom of things.

The story as it now stands, though -- with insiders enjoying an edge over ordinary investors -- supports a broader narrative depressingly familiar to most Americans: Which is that the stock market is a rigged game.

Evidence that the little guy is apt to be burned by Wall Street has been piling up since the dotcom boom. After the crash of the Nasdaq in 2000, we learned how the Internet stock bubble was designed to favor insiders: How Wall Street firms and investors scored big on tech IPOs for companies with no profits; how investment bank analysts like Henry Blodget publicly touted dubious Internet stocks in ways that helped their banks' bottom line but misled investors; and how, after the bubble burst, we learned that top tech executives at doomed firms had dumped much of their stock when it still had value, making a fortune, even while urging Main Street investors to hold onto their shares.

Investors got screwed big time again just a few years later when the banks bundled subprime mortgages, ratings agencies turned a blind eye to the risks of these securities, and anyone who bought this crap ended up losing their shirt. The broader crash of the market, courtesy of Wall Street risk addicts, also wiped out trillions in stock value.

Some of the revelations of how insiders raked over investors during this episode have been stunning, like how Goldman knowingly peddled out junk to its clients and allowed a top hedge fund manager to profit at the expense of other investors.

Oh, and let's not forget about MF Global, a more recent shameful episode, in which a Wall Street brokerage basically stole $1.6 billion from customer accounts that, by law, it was never supposed to touch.

The mishandling of Facebook's IPO doesn't seem all that malovent to me, based on the information that's come out so far. It's not clear there was a deliberate and self-interested effort to keep small investors in the dark about earnings projectsion, as much as just bad management of the process.

Still, it fits a pattern. Which is that Wall Street can't be trusted to act in the interests of Main Street.

After the dotcom crash, and the frauds at Enron and Worldcom, there was bipartisan agreement that stronger regulation was needed to ensure public faith in financial markets and thus keep the capital flowing that business requires to grow. Sarbanes-Oxley was the result, signed by President Bush. No such consensus existed after the bigger crash of 2008 and a pitched battle is now being fought to stop Dodd-Frank from ever being implemented.

All this is weird. Conservative apostles of supply-side theory say that want to do everything possible to facilitate capital formation and make more money available to grow the economy. But they are hostile to one of the most basic ways of ensuring a robust stock market: Which is to guarantee that the game isn't rigged against investors.