The Facebook fiasco continues as the Wall Street Journal is reporting that trading desks at banks like JP Morgan and Goldman Sachs helped some firms short Facebook by lending the stock out. The big kicker? Those two banks also helped underwrite the IPO and promote the stock.
Morgan Stanley (most notably) reportedly bought up Facebook stock to the keep the IPO price above $38 during the first day of trading a week ago. The Telegraph reported that JP Morgan and Goldman joined in on the buying too. At the same time, those same banks could’ve been helping push down the price through short-selling. (Morgan Stanley, as the lead underwriter, was actually prohibited by law from lending shares to short, reports the WSJ.)
The act itself highlights a key conflict of interest issue at big banks with widespread operations. From the WSJ—
The role of the firms in enabling short sellers in Facebook’s stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.
Despite the fact that the banks were lending out the shares for other firms to short, they are still able to make a profit by asking for a high interest rate on the borrowing—up to 10 per cent to 40 per cent, according to the WSJ.
By shorting the stock, investors borrow shares from a lender and sell it with the expectation that the stock price will fall so they can buy it back at a cheaper price to return to the lender, and pocket the difference as profit. Seeing as Facebook shares have fallen over 20 per cent since its first day of trading a week ago, we can expect that investors betting against the social network have made a hefty profit.