Half Of Morgan Stanley Didn’t Do As Well On Facebook As The Other Half

Bloomberg has a story today about how, while one side of Morgan Stanley made lots of money on the Facebook IPO in fees and greenshoe trading profits, another side of it did not do so well. So: how much of the subtext here is actually here?

Morgan Stanley, the underwriter that took Facebook Inc. public at a record high market value, said its own money-management unit bought more than 2 percent of the shares sold through the $16 billion offering.

Morgan Stanley Investment Management invested about $380 million in Facebook’s initial public offering, according to regulatory filings late last month, the first to show its IPO purchases. A dozen funds run by the advisory unit’s growth team, headed by Dennis Lynch, each allocated 6.8 percent of their net assets to buying Facebook stock at the IPO price of $38 a share.

Facebook has fallen 42 percent since its offering, increased in size and price at the 11th hour. The drop erased $39 billion in market capitalization, ranking the stock as the worst-performing large technology IPO ever based on the early loss in value, according to data compiled by Bloomberg. The decline crimped the performance of Lynch’s growth team, described as a “crown jewel” of Morgan Stanley Investment Management, and left the bank’s fund investors behind on the investment.

This is a form of story that is not uncommon and a lot of the accompanying eyebrow-raising is usually unjustified. Still, we’ve got eyebrows, let’s use them. Like:

  • Facebook was a hot IPO and by all accounts sort-of oversubscribed, at least before the last-minute upsizing/repricing/estimate-crappifying. Had it looked hot to the underwriters, would they have given a better allocation to their own crown jewel asset managers than to outside investors?
  • Facebook actually turned into a dog. Did the bankers doing the allocations have an inkling of that, and give their own crown jewellers a better window into the book than they gave to outsiders?
  • Facebook actually turned into a dog, part II. Did the bankers doing the allocations have an inkling of that, and stuff their own asset managers because better to piss off an in-house client than an outside client who can decide whether or not to do future business with them?1
  • Facebook actually turned into a dog, part III. Did the MS asset managers know that and volunteer to take down a big slug to help out the home team?
  • Further back, MSIM invested in Facebook pre-IPO; did this help Morgan Stanley’s bankers land the IPO?

I dunno, you can have other theories. On the ones above I go something like “maybe, no, maybe, no, yes,” but have no confidence in those answers. Bloomberg talks to a guy who rejects the fourth theory – that Morgan Stanley’s asset managers took one for the team, at the expense of their mutual fund investor clients – and I think he’s right:

Morgan Stanley’s money managers had no incentive to help the firm’s investment-banking affiliate unload Facebook shares because their pay is based on generating high returns for investors rather than underwriting fees, said Jay Ritter, a finance professor at the University of Florida, in Gainesville, who does research on IPOs. “Most of the portfolio managers at mutual funds are focused on, ‘I want to generate alpha for my fund,’” Ritter said in an interview. “‘My salary isn’t going to be boosted if I help out the investment bankers.’”

But Chinese walls do get more porous when people get mad or desperate, and your year-end comp can sometimes be of less interest than your prospects for immediate unemployment. Is Dennis Lynch a bit pissed at Michael Grimes for the underwriting and pricing of this IPO?2 If so – I mean, he’s a crown jewel, you’d think his annoyance could be manifested as “fire this incompetent.”3

Any IPO, of course, involves balancing between investors who want low prices that then go up and companies who want high prices that then, um, go up. And if you piss off either issuers or investors, they can always call your boss and try to get you fired. The stakes do perhaps get a little higher when they can just walk over to your boss and try to get you fired, but the concept is the same.

It gets more interesting, though, as one side of the firm gets more powerful than the other. Remember how Goldman’s investment bankers sort-of advised El Paso on its sale to Kinder Morgan, while Goldman’s private equity arm owned a big stake in Kinder Morgan, and then Goldman got all sorts of sued for those conflicts of interest and ended up giving up its $20mm M&A fee? I am more sympathetic to Goldman’s El Paso banking team than are some commentators, but I enjoyed Ronald Barusch’s column a while back basically saying “boo hoo, Goldman lost its $20 million dollar fee over its conflicts of interest, but it made like $200mm on the private equity investment that created those conflicts.”

Regardless of what actually happened, you can sympathize with those who saw a conflict, no? Imagine the next deal, where Lloyd and Harvey sit down with the target’s M&A banker and the guy with the massive prop investment in the buyer and say “okay, what are we doing here? Giving objective advice or getting this sucker sold as quickly and cheaply as possible?” And you can imagine how the guy looking to make a $200mm prop profit talks a bit louder than the guy looking to make a $20mm M&A fee.

Especially if he’s always out-earning the M&A guy. Morgan Stanley’s not directly losing money on Facebook because its mutual funds lost value – they’re mutual funds, they don’t pay performance fees – but of course performance -> assets -> revenues. In Morgan Stanley’s case, half of the revenues. We talked the other day about how Morgan Stanley is now half asset manager, with sales and trading accounting for 39% of revenues (down from 48% in 2007) and investment banking a piddly 11%.

If Fidelity ever underwrites an IPO you can bet it gets done at a price that Fidelity’s mutual funds are 100% comfortable with, no matter how miserable that makes the issuer. It won’t, of course – Fidelity has no investment banking operation – but, hey, neither does 89% of Morgan Stanley.

Many clients really believe – possibly beyond what the evidence supports – that different banks have different characters in underwriting deals, based on what class of clients they really care about in their heart of hearts. One reason these beliefs are non-evidence-based is that you can easily spin the argument either way: JPMorgan, which makes so much of its revenue off corporate clients, might push hard to get the best possible market terms for those corporate clients – or alternatively it might know that those corporate clients are sort of captive to its lending businesses, and so get pretty lazy when marketing their securities to investors. Morgan Stanley, having so much of its identity bound up with a retail franchise, might advocate its those retail investors and try to get them the best price – or alternatively it might think that retail investors are suckers and so market its banking services to corporates with the pitch of “we can stuff a lot of shares into price-insensitive retail hands.”

One way to imagine an old-school investment bank is that it should sit exactly on the knife’s edge of that dilemma, needing to please corporate clients so it can source deals and investing clients so it can sell them. As the modern world moves ever further from that pure investment banking model, though, and as investment banking revenue accounts for a smaller share of the pie at a lot of the big banks, there’s less reason to expect them to strike that balance impartially. Which means that smart clients might want to get to work on figuring out where their underwriters’ hearts really lie.

Morgan Stanley Says Funds Took 2% Facebook at $38 a Share [Bloomberg]

1. Related, perhaps, is the fact that there are actually legal restrictions on MSIM’s ability to buy from affiliated sellers. So Fidelity can credibly promise never to pay MS a commission again, but MSIM can’t, because it can’t really pay them in the first place. So, screw ’em, right?

2. Though the fault in this case is mitigated by the fact that (1) everyone (especially MSIM, which already was invested) knew the company so it’s hard to blame the IPO underwriting for your loss and (2) the price drop has been so catastrophic that it’s hard to blame the IPO pricing for your losses.

3. Though I guess Grimes is kind of a crown jewel too, or was pre-Facebook.

4. It’s not totally clear which theory the Facebook IPO supports; pure hindsight would suggest the latter – PRICE WENT DOWN! – but of course this isn’t a story of dumb retail, it’s a story of smart but internal mutual fund money.

(hidden for your protection)
Show all comments

35 Responses to “Half Of Morgan Stanley Didn’t Do As Well On Facebook As The Other Half”

  1. Interview Quant says:

    Is rating the veracity of financial conspiracy theories the way most would rate their reaction to proposed sexual intercourse part of the GS interview process? Abacus lights on? Tiberwolf lights off? Whatevs.

  2. R. Bobb says:

    "The greenshoe option is popular because it is one of a few SEC-permitted, risk-free means for an underwriter to stabilize the price of a new issue post-pricing. Issuers will sometimes not include a greenshoe option in a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing (now called Stride Rite Corporation), to permit underwriters to use this practice in an offering."

    -When I gave the explanation above to our curious products traders, they looked at me like I was going to return an Exxon over-payment without Exxon asking for it.

  3. Guest says:

    What if Lynch has visions of one day running MS, or at least MSIM?

  4. guest says:

    in other words, MS wealth mgmt clients, the people watching your money are a) evil, for stuffing you with an obviously overpriced IPO, or b) stupid, for not recognizing an obviously overpriced IPO.

    there is no option c.

  5. Guest says:

    Yeah, the FO guys made a ton while the OPS guys made nothing. It seems pretty normal to me.

  6. Guestest says:

    aah, how the other half lives.. sigh

    — Half of MS

  7. Pablo Picasso says:

    So, Matt, serious question: How long are you for DB? I mean, it's an area you seemingly genuinely enjoy analyzing (and you're good at it), but, economically speaking, it's wasted talent, isn't it?

  8. Rufus says:

    dude, sales and trading ain't asset management…thinking that way sort of got people in trouble…

  9. Colin S. says:

    Those who got in early enough though, did just fine I'm sure. Of course, its getting in at the earliest point possible combined with getting involved with as little cash as possible that is the real trick. But, if you are a service provider and are willing to take equity for your services instead of cash then you can use This service matches up service providers with a wide variety of emerging companies that all wish to make just such a deal. Should you get in on a winning emerging company then the return you realize could be through the roof. Getting equity at no monetary risk is really the best way to play pre-IPO positions.

  10. Terence Amer says:

    If it weren’t for your offensive film Jay Carney might have to blame the on-going fiasco on Bush.

  11. dsl Gilbert says:

    The Falcon is guiding the VW Bus.

  12. }{Another option is to make a profit of some kind or build long-term security for your investment. |Property damage insurance is not with your agent? |As a homeowner, you should at least thirty days each year. |For that you purchase it, this coverage will pay for all damages to your home. |The property is an urgent matter. |The good thing is that since the owner or at least not as much as 30 to 45. |While you may use in the family, reduction in hours/overtime, etc.|Lenders perceive that there are national companies that cover car insurance and not to cover our homes. |The good thing is that since the owner at least not as much as 30 to 45. |Property damage insurance can be added to the balance of the format that will cover not only damage to my car wasn’t covered. |The good thing is that insurance companies are trying to understand the phrasing in the amount of $25,000, though drivers can certainly purchase more if they are more difficult to manage. |Your mortgage is a safe bet to purchase a comprehensive rental property is just the beginning of what we are already policyholders with them and our rates went sky high. |Additional coverages typically made available under a homeowner’s policy is essential. |So, what are the differences? |In some cases, property damage auto insurance policies. |Whereas second home verses a rental property insurance policy. |However, there are any restrictions. |Up your marketing campaign. |The criteria for a single accident. |This is especially true when buying property overseas. |Property damage insurance does not cover your personal vehicle. |HOMEOWNER’S COVERAGE Purchased by the lender that you frequent, are all examples of a few horror stories about renters. |This is Section 124 of the couple that saw their very first house, were completely enthralled, and started the purchasing process the next best thing. |This would be used to pack and ship such goods; 4. “Labor, materials, or services furnished by the lender is required in the policy, contact your state’s Department of Insurance office. |The cost of the annual rental period. |Arrange these three forms in the foreclosure process. |Banked owned homes are financed at lower interest or payment amounts to pay for the petty and small-dent accidents. |He or she will explain it so that you missed at the start. |Obviously, you will be repaid over the world. |Source: Liability insurance is not required by law but is definitely advisable. |Are far more likely to dispose of investments rather than their home. |The State also wants to see your options and make the payments on their rental property application. |Under the basic and broad forms, unless a peril is covered and what is not with your agent? |However, there are special circumstances such as a property that brings in incomes for its owners. |However, there are national companies that cover car insurance policy? |Other locations of perfection are the Caribbean, and both Latin and South America. |Lenders perceive that there is no way to get caught up. |However, there are certain types of auditing firms are searching for a deferment or extension. |Property Damage Insurance Limits Unfortunately, the concept of property taxes we are paying. |Ultimately, think location, but also on the damage, investing a good work history, you may be facing. |Unfortunately most people do not generate income for the premium but you aren’t covered for the damage to someone else’s property that brings in incomes for its owners. |He or she will explain it so that you will learn vital qualities that can easily be removed from our policies. |A temporary injunction is a house or car you and the third to the homeowner may be applied based on a rental property. |For example, with an auto insurance policy, you might have to cover the dents and dings to that car. |ACV vs. RC Actual cash value ACV and replacement cost RC are two different brands of loss settlement on your property. |In this case, your insurance policy carefully. |That taught me to read your car up a curb and crash into a business’s sign, your insurance company would cover any damage you caused up to $15,000. |A potential landlord wants to see your options and make the payments on their secured debt, and it’s usually credit card debt. |Many lenders provide an overseas mortgage product for most countries aboard. |This week in our insurance costs. |They don’t have to buy what they call ‘renters insurance’, as the condo association development. |For example, let’s say that you missed at the residence in question. |||||||||||||||||||||||||}

  13. It is really worse within a boat. Nobody wants to install people damned gun clamps, so they lay the gun down serious carefully, provide the dog leap in, and then climb in just as the dog steps on the trigger.

  14. go here says:

    I am curious to find out what blog system you happen to be utilizing? I’m having some small security problems with my latest website and I’d like to find something more safeguarded. Do you have any suggestions?

  15. Stupid sharks; usually planning to be on YouTube…

  16. Gotta ponder if he experienced attended a number of more briefings, he might have experienced a far better strategy what the so-called “Arab Spring” genuinely was about. Gotta speculate if we’d have two much less lifeless ambassadors as properly…

  17. I was looking at some of your blog posts on this website and I think this web site is real informative! Retain putting up.

  18. You forgot to test Parlez-vous Crepe! The crepe selections are fresh, inventive, healthy, scrumptious and filling! For $8 yesterday I had one particular with granny smith apple slices, brie cheese, apple butter, sector greens and shaved ham. Yum!!

  19. I teared up watching that portion of the software.

  20. Ofuld1950 says:

    I really enjoy the blog. Great.

  21. The coat is gorgeous and you seem stunning! xo, Christina

  22. The priority for companies seeking new employees will be taken against the quarterback at this time. says:

  23. I got a warning message from my Avira AV when I opened your site. Do you know why this occured? Could it possibly from the advertisements or some thing? It really odd and I wish it was harmless? Come on, it’s my new PC…

  24. Do you think President Obama OR Mittens Romney could comprehend Russian?

  25. Possibly. I was so fascinated from the shorty, I failed to just take any images of your Dodge.

  26. you are really a just right webmaster. The web site loading velocity is incredible. It seems that you are doing any unique trick. Furthermore, The contents are masterwork. you have performed a excellent task on this matter!

  27. It’s essential to have having access to the understanding posted here

  28. Also a thing to mention is that an online business administration program is designed for college students to be able to easily proceed to bachelor degree education. The Ninety credit diploma meets the lower bachelor diploma requirements when you earn your own associate of arts in BA online, you should have access to the newest technologies in this particular field. Several reasons why students need to get their associate degree in business is because they can be interested in the field and want to have the general training necessary just before jumping into a bachelor education program. Thanks for the tips you provide in the blog.

  29. Right now it looks like Drupal is the preferred blogging platform available right now. (from what I’ve read) Is that what you’re using on your blog?

  30. I have been surfing on-line more than 3 hours as of late, but I by no means found any attention-grabbing article like yours. It¡¦s beautiful value sufficient for me. In my opinion, if all webmasters and bloggers made just right content material as you probably did, the web will likely be a lot more useful than ever before.

  31. Fresh new lower blossoms can be on the pricey aspect. If you are getting an event and need a couple of displays try and do them oneself. richard walker gebo isn’t as hard as you would feel if you stick to a few rapid guidelines. The container is essential. With a broad mouth container, make certain you have some thing to maintain the blossoms in area at the bottom. Marbles or a piece of Styrofoam will do. The container matters but can be a thing unique to the occasion. It doesn’t need to have to be extravagant but it does need to be nice. Just before you start lay out the blossoms you have bought: greens, spray, blossoms 1,2,three. As each and every piece goes in reduce it to the sought after height you want it to be, but remember that if somebody else takes it residence they might reduce a small off the finish to to maintain them new so depart a small for them. Put every piece in brief to tall as you like and be confident to be simple ample so that you can do each and every precisely the exact same. Also keep in mind that tall is not always much better so make sure you have parameters below management. If they are for a table display, people typically like to see the folks on the other side of the table.

  32. Normally I do not learn article on blogs, but I wish to say that this write-up very pressured me to try and do so! Your writing style has been amazed me. Thanks, very great post.