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Comment by jsdalton | Hacker News Reader

Of course, Facebook and its original investors made out well. But a stock that immediately falls below its IPO price represents a failure of the underwriters, not of the company itself.

Basically, Morgan Stanley convinced a whole bunch of its most favored clients to buy a stock at $38 that was worth only $33 or whatever. Those are the people who got "ripped off", so to speak.

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Morgan Stanley makes a ton of money this quarter, while telling their customers that they should stay in for the long term (5+ years). It is too bad those people are getting screwed by Wall St. But a fool and his money are soon separated, or whatever that quote is.

On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market. Since FB is down 11%, they've already lost about $330M on that. Not chump change even for MS.

> On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market.

You don't understand the greenshoe: MS didn't spend a dime. That money came from selling initial shares from the "overallotment". Essentially, suckers who paid too much.

If the price had stayed above the IPO, that money would have gone to FB. Since it dropped below, MS is plowing the money (on behalf of FB) into manipulating the share price.

Edit: My more detailed explanation here - http://news.ycombinator.com/item?id=3996536

The shares they bought were just to cover their short position. They didn't loose a bit, they just didn't profit even more (which they would if the share price would go up).

You mean they would profit more if the price would go *down? The way I understand it, you make money on a short when the price goes down because you can buy back the shares you shorted at a lower price.

No, see the link in the comment below. If the shares go up, the underwriter can close his short position by buying a number of shares from the IPO company, at the IPO price (which is below the market price), therefore effectively profiting.

I don't think it's legal for an underwriter to short the price of a security that they're bringing to the market.

That's simply not true. The SEC allows this behavior to stabilize the price.

http://en.wikipedia.org/wiki/Greenshoe

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