Felix Salmon

Is Goldman Sachs going to start trading Facebook shares before they even go public? Dan Primack thinks it’s a possibility, and I’m inclined to agree.

We’ve already learned, from the NYT, that Goldman has put together a plan for creating a tradeable company:

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Such a vehicle would hardly be unprecedented: there’s even a company called Felix Investments which has already done something very similar. But the difference with the Goldman vehicle is that Goldman, being a broker-dealer, could easily start pitching its vehicle as something to be traded, rather than as a simple buy-and-hold investment in Facebook.

Since you need to be rich and special to become a Goldman client and therefore eligible to invest in this vehicle, let’s call it Status Upgrade. Status Upgrade will then buy 30 million shares of Facebook for $1.5 billion, and issue 30 million shares of its own to its investors, all Goldman clients. Status Upgrade will be a firm which invests in other firms, a bit like Berkshire Hathaway, except it won’t be publicly listed, and it will only invest in one company, Facebook.

Goldman will then act as a middleman between its clients who want to buy and sell shares in Status Upgrade. Because they’re shares of Status Upgrade rather than of Facebook, Facebook itself doesn’t have a right of first refusal to buy them back, and trades can happen at any time, rather than only during intermittent auctions on SecondMarket. As such, the secondary market in Status Upgrade shares would probably be much more liquid than the current secondary market in Facebook shares. (This is also a function of the fact that Status Upgrade will have a large market capitalization of somewhere between $1.5 billion and $2 billion.)

The more active the trading in Status Upgrade shares, the more accurately that Goldman will be able to price any future Facebook IPO. And meanwhile, shareholders in Facebook might be able to swap out their shares for new shares in Status Upgrade, thereby trading increased liquidity for decreased voting rights.

Henry Blodget, looking at the Status Upgrade shareholders, isn’t happy:

Does this new system–private IPOs only for Goldman clients–improve our financial markets? Are we–and you–better off now than when more companies wanted to go public and public-market investors were free to make their own decisions about what firms they wanted to invest in?

Specifically, is the economy better now that you are prevented from considering investments in small, speculative companies–and smaller companies have fewer and more-expensive ways to raise capital?

Certainly not from where we sit.

This doesn’t make a lot of sense: Facebook is not a small company by any stretch of the imagination, certainly not compared to genuinely small and speculative companies which are having public IPOs. But if multi-billion-dollar companies start trading in a shadowy private market accessible only to Goldman clients and which doesn’t have to comply with stock-exchange rules about reporting prices and the like, then we lose the level playing field and sense of equal opportunity which is afforded by public markets.

Back in 2007 I was saying that “the move from public and transparent markets to private and opaque markets is more than a blip,” and I still think that way: Facebook seems to be going out of its way to avoid public scrutiny.

To John Cassidy, this is a sign that Goldman is “trying to twist the securities laws for the benefit of itself and one of its clients” — the securities law in question being the one which says that once a company has more than 499 shareholders, it needs to disclose a lot more information about itself to the public. But as Dan Primack notes, Facebook has decent reasons to go down the private-exchange route even if it complies with all those disclosure rules:

This investment will not necessarily precipitate a Facebook IPO—even if the SEC finds the company in violation of the 500-shareholder rule, and requires it to publicly disclose financial information. Facebook clearly has no need for capital (a prime motivator for IPOs), has plenty of liquidity options for existing shareholders and still could avoid many public company hassles outside of the financial filings (no need to meet with analysts or hedge funds, do quarterly earnings calls, etc). In fact, one even could argue this deal makes an IPO less imminent.

It’s an intriguing possibility. Primack reported last week that Facebook is probably already in regulatory compliance, after more than a year of having David Ebersman as its CFO. Rather than rush to an IPO the minute that it breaks the 500-shareholder barrier, it could continue to allow its shares to trade on Goldman’s private exchange more or less indefinitely. Mark Zuckerberg clearly has no desire to run a public company, and he might be tickled by the idea that shares in Facebook, like his personal information on Facebook, are available only to a certain group of friends. The SEC can force him to disclose certain corporate information. But it can’t force him to go public.

From today’s WaPo report it seems that the shortlist to replace Larry Summers at the NEC has been whittled down to three men — Gene Sperling, Roger Altman, and Richard Levin.

The first thing to note here is that, as Brad DeLong notes, the delay in replacing Summers does not reflect well on the White House’s professionalism and ability to get things done. It’s been over 14 weeks since Summers officially announced his departure, and I’m sure the White House has been looking for a replacement for longer than that. But they’ve left it so long that the position is now unfilled. Writes DeLong:

Either promote Jason Furman to the job, or tell him who he is going to be working for. Keeping your staff positions staffed is the first task of government. It’s not rocket science.

The second notable characteristic of the three is that they’re all multi-millionaires with close ties to Wall Street. None more than Altman, of course, who has his own bank. But Levin is on the board of American Express, which paid him $181,362 in 2009, and where he has shares and “share equivalent units” worth $539,000. Which might not be a huge sum compared to the $1.5 million or so that he’s earning at Yale, but is still more than enough to make him a denizen of Wall Street rather than Main Street.

Finally there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street. The other two have well-defined and easily-understood jobs; Sperling, by contrast, signed up with the Harry Walker Agency and started giving speeches to anybody with cash, including not only Citigroup but even Allen Stanford. He also wrote a monthly 900-word column for Bloomberg for $137,500 a year, which works out at about $13 per word. Then he started “advising” Goldman Sachs on its charitable giving, which advice came very expensively indeed:

Goldman Sachs paid Sperling $887,727 for advice on its charitable giving. That made the bank his highest-paying employer. Even Geithner’s chief of staff Patterson, who was a full-time lobbyist at the firm, did not make as much as Sperling did on a part-time basis. Patterson reported earning $637,492 from Goldman Sachs [in 2008].

As Ezra Klein says,

His duties at Goldman Sachs were primarily on a $100 million charitable project to help raise the skill levels of poorer women in developing nations, but in some ways, that makes the transaction more peculiar: You tend not to get paid that much for offering guidance to charitable endeavors. It is very hard to believe that Goldman Sachs wasn’t attempting to buy influence with a politically savvy economist who had good relations — and would later go to work for — the incoming Democratic administration.

Noam Scheiber does his best to defend Sperling, but is far from persuasive—the general picture he paints is of a man whose heart might be in the right place but who never seems to get anything done. The last time he was at the NEC he sat quietly by while Treasury pushed through various deregulatory measures; within the Obama administration his main claim to fame seems to be the bank tax, which never actually got enacted.

More generally, Sperling has done nothing to counter the general impression that he’s one of many Rubinites in the administration, in the context of a political atmosphere where one of the few points of agreement between the right and left is that the departure of Summers can and should be taken as an opportunity to finally put as much distance between Obama and Rubin as possible. As Mark Thoma says,

A break from the Wall Street connected side of the Clinton administration would have political value. Even better, no matter the choice, would be to show through action that the administration is, in fact, determined to reduce the chances of another meltdown by being tough on the financial sector. But, so far as I can tell, that doesn’t seem to be the direction Obama intends to go.

The problem, of course, is that Wall Street became so big and so pervasive over the course of the boom that it’s hard to find people to run the NEC who haven’t been paid large sums by banks at some point. And even if they are relatively pure on that front, there’s every reason to expect that they’ll pull an Orszag and start taking millions of Wall Street dollars the minute they leave. Obama can try to distance himself from Wall Street, but it isn’t easy.

The NYT reports that Goldman Sachs is investing $450 million of its own money into Facebook and that it’s bringing along $50 million from Digital Sky Technologies and as much as $1 billion more from its high-net-worth clients — all at a valuation of $50 billion.

The enormous sums of money involved here clearly ratify the valuation: this isn’t a handful of shares trading in an illiquid market, it’s an investment substantially larger than most IPOs.

It’s worth remembering here that only two years ago, when Microsoft bought into Facebook at a $15 billion valuation, that sum was described in the NYT as “astronomical”. But that said, Facebook’s multiples have clearly shrunk from those heady days: in 2007, Facebook could actually use Microsoft’s $240 million to fuel its expansion. Today, it’s reportedly earning $2 billion a year, which implies to me that this is a cash-out rather than a dilutive offering. Facebook has raised, in total, about $850 million to date, and there’s no obvious need for a massive new round of funding which would dwarf that entire sum.

If Goldman is leading the buyers, then, who are the sellers? VC shop Accel Partners has been selling Facebook shares quite aggressively of late, at lower valuations than this. They could easily provide all the shares that Goldman is buying and still be left with a stake worth some $3.5 billion. And it’s entirely conceivable that some early employees might well want to diversify their holdings and have maybe a little less than 99% of their net worth in Facebook stock.

As for Goldman, it has probably bought itself the IPO mandate, which could easily generate hundreds of millions of dollars in fee income. It has also become the only investment bank which can give its rich-people clients a coveted pre-IPO stake in Facebook: the extra cachet that brings and the possible extra clients, make this investment a no-brainer. Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets. And that is surely within its abilities.

BofA tries to head off the Wikileaks threat, as much as it can. Which is hard, since there’s nothing it can do — NYT

“She died in 1995, yet her signature later appeared on thousands of affidavits submitted by Portfolio Recovery” — WSJ

RSS Is Dying, and You Should Be Very Worried — Camen Design

Countdown to Ocwen’s pointless evictions — Shame the Banks

Wooing the Hesitant Cyclist — Streetsblog

Venezuela to Devalue Currency — WSJ

Academic Economists to Consider Ethics Code — NYT

“Our platform (and the project to build it) is called GANJA. It’s not what you think” — Gawker

Erik Sherman finds the scandalous contract for Forbes contributors — BNet

David Kotok on why Build America Bonds were a good idea, and should be reinstated — Cumber