Sorry, but Facebook is nothing like the Madoff scam

This Facebook thing is getting waaaaay out of hand.

Barry Ritholtz posted a video interview Thursday with the WSJ Hub crew in which he compares Facebook to Bernie Madoff, the ponzi king.  ”There’s greed and greed that gets you sent to prison,” Ritholtz says. And the reporters didn’t  challenge him.  Unimpeded, Ritholtz pivoted to a warning that investors must be wary of companies that invent their own system of metrics — like Groupon (arguably, a Ponzi scheme). Anyone who has ever touched a “like” button on any website counts as a Facebook user. This is no secret. It’s stated in the regulatory filing. Loads of people  believe that the Facebook system of counting users is ridiculous, so they look to Nielsen or other third-party firms for the data.

And what about all that trading of Facebook on private exchanges before the IPO? That was  totally opaque, Ritholtz says. I guess that’s supposed to be Bernie like.  By definition, those exchanges are not transparent. Anyone who treads there is stepping into treacherous waters. That’s why you need to be an accredited investor to swim in those waters.

Do all those things make Facebook a minor Madoff? When last I checked Facebook was a real business with earnings and revenues.

True, the underwriters and Facebook tried to raise as much money as possible. They overplayed their hand. Nasdaq made a mess of the opening. And there was some real ugliness: the media is reporting that Facebook and analysts at the major underwriting firms notified favored clients that second quarter earnings were likely to disappoint — just days before the IPO priced. All that is certifiably icky. But it appears to be legal.

Even before the Facebook IPO became a slo-mo train wreck,  people like me were saying don’t invest unless you are using money designated for high-risk ventures. Read my ebook, The Facebook IPO Primer. Read the Wall Street Journal. I personally know brokers even at Morgan Stanley were trying to steer away their clients. The media was filled with interviews with tons of bloggers and analysts saying that the company was probably worth about $70 billion, not $100 billion. In my ebook, I included one who said the company was worth only $30 billion — at the time an assertion so outlandish that I almost didn’t include it.

And what about our friend Bernie? He was the hail-fellow-well-met who lied through his teeth. The big man on campus was a putz. He fabricated monthly  statements.  The lone voices who questioned his returns were hushed by his admirers. Madoff deserves to be in jail for the rest of his cursed days.

But the execs at Facebook? I don’t think that should be their fate. Unless greed and stupidity are indictable offenses. In which case we’d really have a jail-crowding problem!

Facebook isn’t Google, it’s Mark Zuckerberg – excerpts from my interview with Abnormal Returns

Tadas Viskanta, the blogger behind Abnormal Returns, invited me to be a guest columnist this week to discuss Facebook on his website. Part I appears today and looks at how Facebook is and isn’t like high tech IPOs of the past. Here’s a brief excerpt:

AR: The Facebook deal is the first big game-changing IPO to come down the pike seemingly since Google. Given recent first quarter numbers how does Facebook compare to Google prior to their IPOs?

NM:  The big question people are now wrestling with is how is Facebook different from or similar to hot tech companies like Netscape, MySpace and Google.

What I find so interesting now is that when I first wrote the ebook, a lot of people asked how can you compare Facebook to Netscape and MySpace? They are too different, they said. But that perception changed overnight when Facebook revealed that for the first time ever, total revenues fell sequentially between the fourth quarter of 2011 and the first quarter of 2012. Boom! It was like a blizzard hit on a sunny day in July.

Suddenly everyone was whispering “Myspace.”

Read on here.

Three banks, three first quarter reports but has the risk profile changed?

Three banks, three profitable quarters. But hold the champagne. Strong trading results were behind the red ink at Citibank, Goldman Sachs, and JPMorgan. Core businesses remain weak; accounting quirks contributed to the bottomline. But the Great Recession is far from over.

The question I have: How have their risk profiles changed? Each has taken hefty sums of money from Uncle Sam via TARP but none has seen fundamental improvement to the business model. Trading gains don’t come without increased risk. A Citi spokesman told me that the bank has not taken undue risks (can you imagine him saying otherwise?). But something has to be up.Even with interest rates low, trading is by definition risky.

China worried US may spend too much; seignorage as ‘too big to fail’

One trillion dollars of debt later  and China expresses concern about the fiscal habits of the United States. I have some great mortgages they should consider at much higher yields than US govvies. Perhaps China could hire one of the rating agencies for some due diligence.

The Associated Press reports (h/t www.twitter.com/tliacono):

“China is telling the U.S. to be careful, not to overspend and keep an eye on the dollar,” said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. “There are risks that China cannot control, so they’re depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable.” (emphasis added)

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies.

The AP story goes on to explain that Premier Wen’s speech about his concerns vis-a-vis the US sovereign debt is part of a power play ahead of the G-20 meeting of finance officials this weekend.

“Inside China there has been a lot of debate about whether they should continue to buy Treasuries,” said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.

“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment,” he said. “By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting.”

Financial sabre-rattling. But if  the US and related agencies owe China $1 trillion would it really be wise to undermine the stability of dollar-denominated debt? The privileges of seignorage (i.e., as Numero Uno Debtor) in this century may be another term for “too big to fail” — maybe even too big threaten.

Fitch downgrades Berkshire Hathaway as China frets about US debt — is it really ‘AAA’?

Even though they were critical enablers of the mortgage bubble, the rating agencies  have lost little of their power. Both Treasury and investors quiver before these private agencies. Uncle Sam came to the rescue of AIG for the third time in seven months in part because the Administration feared a ratings downgrade. A ratings downgrade would have triggered yet another liquidity crisis for the hobbled giant. Why do these agencies still have so much unfettered power?

But just to prove that it doesn’t easily hand out AAA ratings anymore, Fitch has slapped down Berkshire Hathaway, reducing its senior unsecured debt to AA because of concerns about its equity and derivatives holdings. So take that Warren. You dare to dabble in der*v*t*v*s?  And at your age? Well, that’s not exactly what Fitch said. Fitch is merely concerned what would happen if Buffet is unable to fulfill his duties as Miss America, I mean, chief financial officer. Bloomberg reports that Fitch is no agist:

“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said. Buffett is 78.

It’s good to know that Fitch Rating won’t be sued for dissing a senior citizen. Rather, the agency is concerned with $37.1 billion in derivatives contracts based on four stock indices from around the world. But Todd Sullivan cogently argues in his ValuePlays blog that the contracts are highly unlikely to undermine Berkshire’s profitability and are indeed most likely to boost profits. (H/T to www.twitter.com/TraderAlamo for the citation.) In assessing the contracts, Sullivan makes a number of assumptions about the distribution of the contracts and the rate of growth in the markets over the next 16 years (the length of the contracts). His key point: In order to lose money, the S&P 500, for example, would need to go to zero. If that happens, well, the world as we know it wouldn’t be worth the paper a triple-A Ginnie Mae is printed on. Sullivan concludes:

“The reality this is just another insurance policy for Berkshire. In the event of a dramatic event they pay off big, anything less, they collect premiums.”

Once, almost anything seemed to qualify for triple-A rating. Now almost nothing does. It’s the flip side of the dumbing down of ratings. The Bloomberg story goes on to quote an asset manager who tries to explain the reasoning of the Fitch move:

The downgrade isn’t surprising because the deteriorating economy is leading to increased uncertainty about all financial companies, said Michael Yoshikami, chief investment strategist at YCMNet Advisors. …

“Triple-A in the end is probably going to be left for the Treasury when it’s all said and done,” said Yoshikami, whose Walnut Creek, California-based firm oversees $800 million and owns Berkshire Hathaway shares. “You’re seeing the rating agencies taking an abundance of caution at this point.”

Thanks for the abundance of caution: Does the caution also apply to sovereign debt? The No. 1 lender to the leader of the free world would essentially like to know just how solid the AAA rating is for the US Treasury. The top story on Bloomberg’s homepage (just a hop away from the Berkshire item) reports:

China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said today at a press conference in Beijing that marked the closure of the annual National People’s Congress meeting. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Treasurys dropped 3.1 % in January and 0.5 % last month, according to Merrill Lynch’s Master Index. The 10-year note backed up 0.03% on the premier’s speech, Bloomberg reports, to yield 2.89%.

I would strongly urge Premier Wen to contact the US credit rating agencies immediately for assurance. At the moment, they seem to be the ultimate arbiter of the safety and soundness of our system.