Quote of the Week

Last week, I wrote briefly about Facebook (and its apparent attempts to take over the world) while discussing the unceremonious decline of MySpace. This week, I'm writing about Facebook again, but this time it's for my Quote of the Week.

I mentioned in my MySpace post that Facebook--with an assist from Goldman Sachs--was essentially trying to rewrite the rules of our financial landscape, by trying to design a mechanism to offer shares to the public without, you know, going public. Today, that attempt seems to have gone bust, leaving both Facebook and Goldman with a fair amount of egg-in-the-face. Without further ado, courtesy of The Wall Street Journal:

This week's QUOTE OF THE WEEK

Goldman Sachs Group Inc. slammed the door on U.S. clients hoping to invest in a private offering of shares in Facebook Inc., because it said the intense media spotlight left the deal in danger of violating U.S. securities laws.
                                    - Liz Rappaport, Aaron Lucchetti, Geoffrey A. Fowler; Wall Street Journal

I've got plenty to say about this, but I'll give the first shot to Naked Capitalism's Yves Smith, who brought the quote to my attention.

On the surface, this looks like doublespeak of a very high order. The US is a rule based legal system, which means a violation of securities laws is a violation of securities laws, or more precisely, a violation of law can be determined by mapping a fact set against statutes, regulation, and case law. So the idea that legality has anything to do with media coverage is spurious.

But perversely, Goldman’s truthiness is an accurate account of the real state of affairs. Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting.

So the corollary of the Goldman uncertainty principle is: make anything so complicated that mere mortals are deterred from understanding a product or a business practice, and no one will open the box wide enough to see whether it is legal or not.

Amen. I've spent plenty of time over the last couple of months trying to navigate SEC and other regulatory agency rules to determine which ones do and do not pertain to me and my own business. It's not always easy to know what does and doesn't constitute a violation, but Goldman--and Facebook, by extension--seems to think that they've only committed a crime if someone points it out. There's certainly a little more to the story than that simplistic conclusion implies, but that confusion only further proves Yves' point.

Goldman's goal here was to blur the line between legal and illegal market activities, and they got tripped up by a technicality in the process. That's life when you're operating in the gray areas, and both companies deserve the negative repercussions that they're experiencing today. Good try, guys, but if you want to go public, go public.

[Wall Street Journal]
(h/t Naked Capitalism)