Category Archives: Finance

Alibaba and the $21 billion IPO

On September 18th, Alibaba is expected to complete its IPO process and officially become a listed company on the New York Stock Exchange. If the company’s stock price remains in its expected range by the time it is listed, the IPO is expected to raise approximately $21 billion; the largest in US history following Visa’s $19.6 billion IPO in 2008. Before I proceed to discuss the IPO, there may be those of you who have never heard of Alibaba before and think that I’m talking about a Middle Eastern restaurant. No, Alibaba isn’t raising $21 billion to open up a new shwarma stand so let me start off by explaining what Alibaba is.

Alibaba is a Chinese e-commerce firm that was founded in 1999 by Jack Ma, who was previously an English teacher. Similar to Amazon, Alibaba operates a business-to-consumer retail website named Tmall where established companies sell directly to customers. Additionally, Alibaba also runs a website called Taobao.com, which is a consumer-to-consumer e-commerce site where individuals and small businesses sell goods to one another. Finally, Alibaba offers an electronic payment system called Alipay, just like Ebay’s Paypal. Thus, Alibaba is somewhat of a combination of Amazon and Ebay.

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The biggest difference between Alibaba and Amazon is that whereas Amazon facilitates the sale of merchandise between companies and consumers by handling the shipping, Alibaba merely brings the two parties together in an online marketplace. So it doesn’t ship anything. Amazon’s main source of revenue is the commission it charges to companies on every transaction completed through its website. However, Alibaba does not charge any commissions on Taobao. Instead, it charges sellers to advertise on the website in order to stand out among the millions of other sellers on the website and increase their chances of selling their product.

Since its founding, Alibaba has been growing at a rapid pace and has gained control of 80% of the Chinese e-commerce sector. Currently, the company is extremely profitable and nearly unchallenged in its hegemony in China. In the 3 months ended June, the company’s net income increased to $1.1 billion, 42% more than the net incomes of Amazon and Ebay combined. To look at a statistic further up the income statement, Alibaba’s EBITDA margin in the latest quarter was 54% compared to Ebay’s 26.7% and Amazon’s meager 5.7% Currently, the company is owned by Jack Ma, Joe Tsai, who is the vice president of Alibaba, and various other investors including Yahoo who made a very profitable investment in the company by purchasing a 40% stake back in 2005 for only $1 billion.

Here is a short video by the New York Times that gives some more information on the company.

Besides efficient management and a determined vision, Alibaba’s success can be traced to two important factors present in the Chinese economy. First off is the rise of the Chinese middle class. While Chinese income per capita may still be lower than other developed economies due to its large rural population, it can’t be denied that the Chinese are getting richer. As the graph below shows, disposable income has been growing at a steady pace in line with the nation’s economic growth. In January of this year, disposable income rose 9.7% on an annual basis and reached 26,955 yuan. Thats about $4400.

china-disposable-personal-income (1)Yes you’ve probably heard stories and read on this blog that the growth in Chinese economy has been slowing down when compared to its past pace. However, incomes in China continue to rise and the middle class continues to mature. That means that the Chinese are willing to spend more, especially on higher quality retail goods that can be found on Alibaba. The rise of the middle class in China also means that internet usage is increasing rapidly, something that is vital to Alibaba’s business. As more of China’s 1.3 billion population gain access to the internet, the more that Alibaba’s revenues are likely to increase. Here’s an infograph provided by the China Information Network Center that depicts the increase in internet usage across China. As you can see, although internet usage is frequent in China’s large coastal cities, it is rapidly spreading to the Chinese countryside. With a consumer base that is already unmatched in size, Alibaba can expect to be even more profitable as more people in China gain access to the internet.

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The other reason why Alibaba and e-commerce has been so successful  in China is because of the lack in the physical retail market. Despite being greatly populous, China’s less developed cities do not have the large shopping malls and well known brands that larger cities such as Beijing has.  This is where Alibaba steps in. The company creates a bridge between the hundreds of millions of Chinese who want to spend their money but want to purchase something other than cheap replaceable products.

As the video stated, Alibaba is set to be valued at approximately $167 billion if it is listed at the expected share price between $60-65. Here is a graph provided by Bloomberg that compares the expected IPO valuation of Alibaba to other tech companies.

Ali baba infographAlthough $162.7 billion is a lot of money, analyst actually believe that Alibaba is set undervalued and set to enter the market at a discount. Market capitalization (a means of measuring the market value of a company) is calculated as share price multiplied by the number of shares outstanding. Thus, it can change as soon as the company becomes public and starts to trade. However, experts had expected Alibaba to enter with a market value closer to $180 billion. The reason why Alibaba wishes to enter the market at a relatively undervalued price is because Jack Ma wants to avoid the Facebook pitfall. Facebook was valued at $200 billion at the time of its IPO. This was an overvalued price for the company as its price plummeted after the IPO and didn’t reach its IPO price until a year later.

2123372283So should you buy into Alibaba as soon as it hits the stock markets? Is it worth committing your retirement money into an e-commerce company run by the Chinese Steve Jobs? As successful as Alibaba is and is set to be, I maintain the same opinion about IPOs as I did at the time of Twitter’s IPO. While you can check out the video below that explains why Alibaba would make a great investment, it is wise to stay weary of IPOs for the first few months. That is because generally, many institutional investors and preferred shareholders make deals with companies to hold their stock for a certain period of time following the IPO. After that period passes by, many of them dump their shares, lowering the price of the stock. So, as you listen to the following video about why Alibaba is a great buy, I recommend that you give the stock time to find itself in the market. If the fundamentals of the company are strong, you can still make a buck off of it if for the next several years even if you enter a couple months late.

“I’m not a tech guy. I’m looking at the technology with the eyes of my customers, normal people’s eyes.”
-Jack Ma

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Too Big to Jail?

It has been a while since I wrote a new post regarding fines and lawsuits brought up on banks in my Revenge on the Street segment. Feel free to  It seemed as if the US Department of Justice had taken a break in its mission to bring justice upon those whose crimes and wrongdoings led to the financial collapse of 2008 and other ensuing scandals such as JP Morgan’s entanglement in Bernie Madoff’s ponzi scheme and the LIBOR rigging affair.

Progressives and liberals claim that the US Department of Justice have actually been letting banks who’ve broken the law get away with their crimes by paying a fine which is usually a meager amount when compared to the profits banks make and the bonuses top bankers earn. They demand that banks and bankers who committed crimes should go to jail like the rest of us would if we stole a car or assaulted a police officer. The reason that banks are not prosecuted and are backed by the government is because of a concept called ‘too big to fail’, or in legal cases ‘too big to jail’. The idea behind this term is that international banks have become so large and so integrated into our economic systems that the government will bail it out if it goes bankrupt (fail) and will prevent any prosecutions that would shut it down or severely effect its structure (jail.)

However, just last week, US Attorney General Eric Holder released a video stating that “there is no such thing as too big to jail” and that “no individual or company, no matter how large or how profitable, is above the law”. Check out the rest of Eric Holder’s statement in the following clip.

Great news right! With the full support of the US Attorney General, justice will finally be served and banks will be appropriately punished for the crimes they committed. In fact it is believed that Holder made this statement in reference to BNP Paribas and Credit Suisse, which should expect legal cases brought upon them soon. BNP Paribas is alleged to have done business with blacklisted countries such as Iran whereas Credit Suisse is believed to have provided illegal tax shelters. and Citigroup is suspected to have provided.

I’d hate to be a pessimist but its wise to not put too much trust in Eric Holder’s words. I’m a man of reason. I base my judgement on facts and historical trends and in this case, history shows that we’re bound to see the same weak treatment of criminal actions as before. A prosecution will be started and will end in a settlement worth a few billion dollars which may sound like a lot until you take a look at the profits these banks make. If you don’t believe me, take a look at this table on the Economist’s website of recent settlements.

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In none of these cases did a single banker go to jail. That why I think this meme sums up the situation displayed in the table pretty accurately.

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Just to be clear, I’m not a progressive or a socialist. I don’t like to attach myself to any form of ideology and I have nothing against the banking sector. In fact, I work in the finance sector. But I do have a problem with the double standard applied when it comes to justice in this world. No one can deny that those who are wealthy and in positions of power get more lenient repercussions for their crimes than regular citizens. Whereas politicians and bankers get away for their multi-million crimes by paying bail or through community service (take a look at Silvio Berlusconi’s punishment for tax evasion), regular folks like you and me would get many years in prison for much smaller misdemeanors. From the table above, I think HSBC’s settlement best explains the injustice that I’m attempting to point out. In December of 2012, HSBC was discovered to have provided money laundering services to various Mexican drug cartels and had also facilitated transactions with rogue nations such as Iran, Libya, Sudan and Myanmar, which is in violation of the sanctions placed by the US Treasury. These may have just been financial transactions, but in effect, HSBC indirectly aided the massacre in Darfur by the Sudanian government and the deaths caused by drug cartels in Mexico. To put some numbers to those cases, roughly 120,000 people have died due to gang related violence across Mexico and somewhere between 170,000 to 450,000 have lost their lives during the conflict in Darfur. Thus, HSBC aided people who have blood on their hands. Usually, the mainstream media does a poor job of covering these issues. However, here is a great ABC News video regarding HSBC’s money laundering scandal.

The Department of Justice did not pursue criminal charges and settled for a $1.9 payment from HSBC. Like I stated before, that might sound like a hefty amount, but in 2012 HSBC generated a profit of $13.5 billion. In my opinion, that makes the $1.9 billion fine sound like a gentle slap on the wrist. News articles state that the money laundering occurred due to cost cutting in the bank’s compliance department. This makes it sound as if no one at the bank had any idea that these transactions were going on. Someone somewhere had to have known and that person should be in jail right now. When asked in a judiciary committee in 2013 by US Senator Chuck Grassley on why the Department of Justice did not indict HSBC, it was Attorney General Eric Holder himself who said the following words:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them. When we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy”

From the mouth of the hero himself, there is the unfortunate nail on the coffin. No matter how tough Attorney General Eric Holder may talk, past cases prove that at the end of the day, the wealth that banks posses and the influence they have over our politicians will lead to injustice. To be fair, I have read news articles stating that the Department of Justice may start banning banks charged with future criminal actions from using US dollars in transactions. This could deal a serious blow to banks that are charged with criminal cases in the future. However, if you consider the fact that I could go to jail for shoplifting or that a junkie on the street can be sentenced to prison for many years for selling drugs to homeless people, we can definitely say that banks will still get away with it.

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So how can we solve the problem of too big to fail/jail? Its a daunting task that is often debated by economists and politicians around the world. I think this post has served its purpose of being a good introduction to this topic and I don’t want to keep rambling on. So I’ll leave that discussion to a future post.

“Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators.”
David Bagley, HSBC’s Head of Compliance

The Bank of Facebook

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Ever feel as if Facebook is taking over our lives? We use the social media website to publicize photos from memorable moments of our lives, rant about our deepest emotions and affirm our social bonds with likes and hashtags. Well it looks as if Mark Zuckerberg has decided to plunge us further in to the Matrix by entering into the financial services industry. Last week, Facebook applied to the banking regulatory agencies in Ireland, where its non-US business is based, to permit electronic transfer of funds for its members in Europe, Africa and the Middle East. If Facebook’s application is approved, users in those regions will now be able to send each other money just like the way my relatives keep sending me Candy Crush requests.

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A few years ago, Facebook attempted a similar move by creating Facebook Credits which would allow users to spend money on virtual items such as that one cute cow you were dying to buy on Farmville. However, the system was a flop and was shut down in 2012. Facebook’s new endeavor into the banking sector is different. This time around, Zuckerberg appears to be taking on money transfer companies such as Western Union and PayPal. Remittances, or the transfer of funds from expat workers to their home countries, is a large part of the economies of many developing nations. For example, China, India and the Philippines each received over $20 billion in remittances over the last year. Because of the low standard of living in these nations, many of its citizens are forced to work abroad to be able to make a living. I spent a majority of my life in Saudi Arabia and I can tell you from firsthand experience that almost a quarter of the country’s population is expat workers. Go out on to the streets and at times you may have a hard time finding a Saudi citizen. Because expat workers in these nations may not have access to traditional banking, they rely on money transfer companies such as Western Union and PayPal. With Facebook’s potential entry into this market, it could soon replace traditional money transfer firms.

The question then becomes, how much further can Facebook or other tech companies such as Google go in the banking industry? In the past several years, large traditional banks have lost consumer confidence due to outdated mobile interfaces and countless lawsuits over its past actions. People feel much more comfortable using Facebook and Twitter than they do using their online banking websites. With over a billion users, Facebook could build on its money transfer mechanism to provide even more banking services. Here is an energetic panel on CNBC discussing this issue.

As the panel mentions, Facebook has still a long way to go before we can consider it actually becoming a bank and taking on Bank of America or JP Morgan. You’re not going to be able to receive complex banking services, such as a car loan, from Facebook anytime soon. However, the banking industry is definitely evolving and with the familiarity and dependence consumers have in using social media websites, Facebook could be a threat to traditional banks in the future if they choose to go down that path. If Facebook pushes deeper into the banking sector by for example giving loans, I find it much more probable that it will partner with a traditional bank rather than becoming a bank itself. As the contributors on the CNBC panel described, being a banking entity would bring Facebook into a new realm of regulations and restrictions; a headache that I assume Zuckerberg would want to avoid.

There is one issue that makes me doubt if Facebook will be able to pull of being a financial services company, and that is privacy. The company is notorious for having shady privacy laws that its users still do not fully understand. One of the ways Facebook makes money is by selling the information of its users to advertisers and marketing companies. If you also add in the fact that Facebook is flooded with fake accounts, then its users might not trust the site to transfer funds or receive banking services from it. Despite the tarnished reputation of traditional banks, I’m probably not the only person to think that transferring funds over a bank feels safer than doing it over Facebook.

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Fake accounts are a serious issue for Facebook.

Over the past year, Facebook has acquired Instagram, Whatsapp, and Oculus VR, a virtual reality gaming company. In my opinion, these acquisitions show that  Facebook is trying to become much more than just a social media website and is actually attempting to have a larger presence in our lives. Thus, banks should ignore Facebook’s new move at their own peril.

“Payment schemes are the equivalent to credit cards in emerging markets and here is where Facebook can make progress … especially in those places where banking infrastructure is not as mature as it is in Europe or the US.”
-Brian Blau, Director at Gartner Inc.

Revenge on the Street – J.P. Morgan Fined for Bernie Madoff’s Ponzi Scheme

J.P. Morgan can’t seem to catch a break lately as on December 12th (yes I know I’m late), the banking giant was charged $2 billion for ignoring red flags related to Bernie Madoff’s Ponzi scheme. To understand this story, we have to go back several years.

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This is Bernie Madoff, the villain behind the whole debacle. In 1960, Madoff founded Bernard L. Madoff Invesment Securities, a wealth management firm. Over the decades, he gained the reputation of being a spectacular money manager as he consistently generated highly successful returns for his investors. However, as the 2008 financial crisis loomed over the markets, it turned out that Madoff’s entire firm was a fraud, a fake, as fake as this Chinese rip off of Apple.

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You see, Madoff was running something called a Ponzi scheme. A Ponzi scheme occurs when a wealth manager gathers money from a group of investors and funnels it to other investors but says that they are the returns he earned from his investing strategies. In reality, there is no fancy trading strategy. Its all just one giant loop and it relies on a continous flow of funds. If investors stop giving or demand their money back, then the scheme falls apart. But with his wit and charm, Madoff kept this scheme afloat for decades. He built relationships with the most powerful and influential figures in the business world and convinced them to invest in his fund. Eventually he also attracted funds from less wealthy individuals and even various charity organizations.

Madoff’s investors were extremely pleased with Madoff’s consistent returns. Even during the periods when the market was on the decline, Madoff’s firm generated positive returns. However, this eventually drew the attention of other investing specialists on Wall Street. Madoff’s investing strategy revolved around buying large-cap firms such as Coke and AT&T and also purchasing options in those stocks as well. Ideally, this strategy should have limited the portfolio’s volatility. Nevertheless, his portfolio should still have been correlated with the market. However, Madoff even made positive returns in times when the market was falling. In the early 2000s, several other investors brought the issue up to the Securities and Exchange Comisssion, the regulatory body that governs the financial sector. However, their pleas were to no avail.

The house of cards collapsed in 2008. As the financial crisis caused the economy to plummet, a large group of investors wanted their money back. Due to the nature of the Ponzi scheme, Madoff did not have enough money on hand and was unable to repay his investors. Eventually, he confessed to his crimes and was brought into custody by the FBI and charged with 150 years in prison.

Jamie Dimon

Well what does this all have to do with J.P. Morgan then? Bernie Madoff operated his wealth management firm through J.P. Morgan. 4 years after Madoff’s imprisonment, J.P. Morgan agreed to settle for a fine of $2 billion following allegations by federal prosecutors that the the bank had ignored various red flags regarding Madoff’s operations. Madoff opreated out of J.P Morgan for roughly 15 years. I don’t know how deep bank’s usually track the activities of their clients but I just got my debit card cancelled for a possible suspicious activity when I hadn’t even used it in over 6 months. My guess is that in 15 years, a couple of hints may have dropped on a desk somewhere in the J.P. Morgan office. Of course, as I covered on this segment before, J.P. Morgan is looking to settle all its legal issues and be done with them once and for all. Thus, it is possible that they might have just accepted to settle case even though they could have pooled their resources to summon enough evidence to prove them innocent.

Its always nice to see crime pay. But its a tragedy that the crime wasn’t detected earlier. If you leave aside the millionaires and billionaires, a lot hardworking people and charities trusted their money in Madoff’s hands. Its heartbreaking to hear about their life’s savings vanish over night. If you’re interested, this 45 minute documentary regarding the scandal contains interviews with various people who had to come out of retirement and start working again at an old age because they lost their savings thanks to Madoff. Though certain regulations can be tedious and disruptive to business, I’m all in favor for regulations that makes it easier to catch any future similar cases that could hurt so many innocent people.

“In today’s regulatory environment, its virtually impossible to violate the rules”
-Bernie Madoff

Revenge on the Street – Deutsche Bank Fined for Mortgage Backed Securities

Another victim on Wall Street and this time its the German Deutsche Bank. On December 21st, in an almost identical case to JP Morgan, Deutsche Bank agreed to pay $1.9 billion to settle claims that it had misled Fannie Mae and Freddie Mac regarding the quality of the loans it had used to bundle into mortgage backed securities prior to the financial crisis of 2008. Here is a panel on Bloomberg discussing this fine in more detail.

The difference between this case and the JP Morgan fine I had discussed in an earlier post is that whereas JP Morgan was fined by the Department of Justice, Deutsche Bank was fined by the Federal Housing Finance Agency (FHFA). Since September of 2011, the FHFA has been on a suing spree and alleged 18 banks and financial institutions with committing the same wrongdoings as Deutsche Bank; misleading Fannie Mae and Freddie Mac regarding the creditworthiness of the mortgages it had sold to them.

Now I’m sure there are some of you out there who have no clue what Fannie Mae and Freddie Mac is. I’ll admit, when I first heard about them, I thought they were a brand of Mac and Cheese. You know I love my explanatory videos for you guys. So before we continue, here is a brief breakdown of Fannie Mae and Freddie Mac.

Of the 18 institutions that the FHFA sued, so far it has settled with only 6 of them. But. as stated in the Bloomberg video, more and more of these institutions are now looking to pay their fines, clear their names and look to the future without any worries for the past. That is exactly what was being discussed in the Bloomberg panel and what Jurgen Fitschen and Anshu Jain, Co-Chief Executive Officers of Deutsche Bank discussed in their recent statement where they said:

“Today’s agreement is another step in our efforts to resolve the Bank’s legacy issues, and we intend to make further progress in this regard throughout 2014”

Call me crazy, but I believe that Deutsche Bank were relieved to have put this whole deal behind them for such a meager amount compared to the whopping $13 billion that JP Morgan had to pay to the Department of Justice. In fact, maybe a bottle of Jagermeister was opened in Frankfurt that night.

Of course, in addition to the cases regarding mortgage backed securities in 2008, there is also the cases surrounding the LIBOR scandal, which I will get to in another post. If one thing is for certain, it is that with 12 institutions still being sued by the FHFA and with more and more of them looking erase their past and approach the future with a clean slate, expect more of these settlements to be in the headlines in the upcoming months.

“In the subprime mortgage industry, bankers handed out iffy loans like candy at a parade because such loans meant revenue and, hence, bonuses for executives in the here-and-now.”
-Thomas Frank

Revenge on the Street

Lately, I had been having writers block and had not been able to write a new article. But after a new interesting breaking story, a catchy title, and some inspirational electronic music, lets get rolling.

Speaking of rolling, heads are rolling on Wall Street these days; mainly, JP Morgan’s head. What is JP Morgan? Well its only the eight largest bank in the world and the largest bank in the United States based on assets. Originally, on August 13, it was announced that JP Morgan was being investigated  by the United States Department of Justice for its sale of mortgage backed securities in the period leading up to the 2008 financial crisis. The Department of Justice claimed that prior to the crisis, JP Morgan had misrepresented the quality of mortgages it was packaging into assets and selling to investors. More specifically, it is claimed that JP Morgan had misrepresented subprime and risky mortgages to investors as safe and sound assets. However, as we all painfully discovered in 2008, many mortgages across the United States were lent out to irresponsible and unworthy borrowers. When they defaulted on their mortgages, the mortgage backed securities collapsed and the price of houses plummeted. By the way, before we move on, if any of that jargon regarding the financial crisis was confusing to you, check out this EXCELLENT graphic explanation of the crisis.

After weeks of negotiations between JP Morgan CEO Jamie Dimon and Attorney General Eric Holder, Dimon finally settled to pay $13 billion of fines to the Department of Justice regarding the investigation. Even though many people assume that Dimon agreed to settle because he wanted to avoid future legal costs in the case of a potential civil suit, I like to believe that Eric Holder put on a Batman costume, and gave Dimon a beatdown in a poorly lit room. Rumor has it that Dimon was heard yelling the following words:

“If you’re a financial institution threatened with criminal prosecution, you have no ability to negotiate…you cannot win..you have a gun to your head”, said Warren Buffet, a couple a days ago. So maybe my theory on how the negotiation went down might not be so far-fetched.

So where will the $13 billion go? $9 billion of it will go to the government to help repay the taxpayers for the $188 billion bailout of Fannie Mae and Freddie Mac, two large semi-private mortgage issuers. They too had bought mortgage backed securities from banks like JP Morgan prior to 2008, and once homeowners defaulted on their mortgages, they too went under. The other $4 billion will go directly to help struggling homeowners pay their outstanding mortgages.

This will surely eat a large chunk out of JP Morgan’s profits for the next quarter. $13 billion is no small amount. According to a study by Bloomberg, JP Morgan’s $13 billion fine is bigger than Southwest Airlines’ market value, Google’s revenue for the third quarter, and JP Morgan’s Consumer Banking revenue for the third quarter.

size of fine

Is JP Morgan hurt? Definitely. Is JP Morgan done for? Definitely not. It still is and will remain to be, a very profitable bank. In 2012, JP Morgan recorded profits totaling to a whopping $32 billion. That’s profits, not revenue! It is true that compared to other recent legal fines that financial institutions have faced, this one is much larger.

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But as the Joker said in the Dark Knight: “Its not about the money. Its about sending a message.”

(Am I on fire with the Dark Knight references or what.)

What makes this case so significant is what it symbolizes, and that is the revenge of Main Street. By that, I mean that since the crash of 2008, not many banks or financial institutions had been prosecuted regarding the shady financial voodoo that went down prior to the economic collapse. Many people who had been severely effected by the crisis are still furious to this day that the banks are not being punished for their wrongdoings. And who can blame them? Because of the games played by bankers, lives across the globe were changed for the worse.

However, just like many things in life, there is no black and white. There are no perfect good guys or pure bad guys. Everything is somewhere in the middle. To understand what I mean, we have to turn around and look at the government. Firstly, it is crucial to note that the sales of mortgage backed securities at JP Morgan were occurring mainly in 2 subsidiaries, Washington Mutual, which was a bank that was known for issuing mortgages, and Bear Sterns, an investment bank. Prior to the financial crisis, these entities were independent companies. However, they both went bankrupt after the housing bubble collapsed. After their bankruptcy, the government persuaded JP Morgan to buy these institutions and save them from insolvency. So one could very easily make the argument that the US government is now trying to punish JP Morgan for owning the very entities that it made it purchase 5 years ago in order to save the United States from utter financial meltdown.

Secondly, why is it that the US government waited 5 years to prosecute JP Morgan? Why not act shortly after the crime was committed? The Department of Justice will claim that it takes a very long period of time to truly crack financial cases. Years of transactions must be analyzed, accounts dating back many years must be studied, and a definitive crime must be found. However, the more likely reason is that the government didn’t want to drive troubled banks off the cliff in 2008 by bringing down legal cases on them. Thus, they decided to look away from their wrongdoings for many years and only started to take them seriously once the economy picked up. Again, the government’s actions fall into a certain gray area. They ignored a crime for several years only to pick it up again. Doesn’t look like an example of pure good will does it?

Many parts of this settlement deal have not yet been finalized. We should receive more information regarding the deals in the following weeks. Until then, enjoy the song that Jamie Dimon has been listening to the most these past several weeks.

This country is a lot better off because Jamie Dimon has been running JP Morgan
-Warren Buffett

Twitter To Go Public – #dontfallforthehype

The company that is single-handedly destroying modern language with hashtags has decided to go public. On Thursday, Twitter announced that it had filed for a secret initial public offering (IPO).  What’s so secret about it? I’ll explain that later. But if everything proceeds as planned, Twitter will follow the footsteps of other social networking websites that have gone public such as Linkedin and Facebook.

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Before discussing Twitter, it is important to comprehend why companies decide to go public. Most companies in developed markets are privately owned. Even some big names such as Domino’s Pizza and IKEA are private firms. Being private allows the management and owners of the company to implement policies with more ease since they aren’t continuously under the scrutiny of analysts and shareholders.

However, a company may go public if they need to raise cash, or in finance-speak, capital, from external sources for the company to grow further. Of course being listed on a stock exchange also gives firms a considerable amount of prestige. Firms usually hire the services of investment banks such as Goldman Sachs or Morgan Stanley to publicize and organize the IPO so that investors are drawn to buy the company’s stock once it goes public.

Once a company does go public, investors will be watching over the company like a hawk. Earnings reports, management statements, new product launches will be observed with much more attention. Because of increased profit expectations, you can expect the company to either launch new products or revamp its business.

With that background information on IPOs, we can now focus on Twitter. Twitter is expected to be valued at around $10 billion and has around 200 million users. Even though Twitter has been successful so far, it’s a smaller company when compared to other Web platform giants such as Facebook, Yahoo, Google and Amazon. By going public and raising capital, Twitter will be seeking to cement itself as one of the big boys of the web industry. In order to develop itself, Twitter will attempt to generate further ad revenue, expand its features, and integrate itself even further with other products. In fact, in an effort to enhance its mobile advertising feature, Twitter recently acquired MoPub, a startup that focuses on mobile ad exchanges

So far it looks like its all going to be sunshine and rainbows. Twitter will go public, its share prices will rocket because everyone has a Twitter account, everyone will get rich, and world peace will be achieved. Right? Right? Wrong! Investors should be very careful when approaching IPOs and in my opinion, its best to avoid them altogether. There are several reasons why it is wise to avoid IPOs.

1)      Firstly, being a public company is a hassle for most firms. They must adhere to various regulations and constantly please investors. Thus most firms choose to stay public. But if they do decide to raise capital, they could do it via a private placement. As opposed to a public offering, a public placement is a way for companies to raise capital by only selling ownership to a few individuals. This process is much easier than having to go through a public offering. If a company has decided to engage in a public offering, it could be that the company failed to raise capital through a placement because they were unable to find large investors. Thus it is important to ask yourself, what is the state of the company I’m planning to invest in?

2)      The IPO will be the first time that a company will have to adhere to certain regulations and reveal its financial statements in detail. Thus your previous conceptions about the firm may be mistaken. The only solid information you will have access to will be the information provided by investment banks who are desperately trying to attract investors.  This is also where the term ‘secret IPO’ comes into play. According to the JOBS Act which was passed last year, a company with revenue below a certain point can release less information prior to an IPO than a firm with higher revenue figures. This makes Twitter’s IPO filing even more suspicious. What have these guys got to hide? Be wary. Wait a few months for the firm to be in the public domain and find its true value.

3)      Most institutions investors who purchase shares during the IPO tend to hold them for a few days and then dump them to make a quick profit. This is why after most IPOs, the price of the stock initially falls. To see a good example, take a look at Facebook. Its price plummeted after the IPO and it took 14 months for it to reach its original price.

Thus, after an IPO, its wise to hold back for a minimum of 4-5 months for the price to settle and the company’s shares to find its true value as opposed to the initial artificial IPO price. You can probably tell that I despise hashtags but if I ever had to use one, it would be as follows: #dontfallforthehype

For more insight, feel free to watch this clip from Bloomberg.

“I’m kind of like the person you would want to ask least about how to make a smooth IPO.”
-Mark Zuckerberg, in response to whether he had any advice for Twitter