Facebook: Smells Like Enron
There continues to be a fallout surrounding the Facebook
As Enron changed the world of auditing and corporate ethics, it seems Facebook will have a similar impact in the way investors view future IPOs. What's more, the company has created a much needed pessimism toward anything that is built up as "larger than life."
Enron brought about change to the extent of Sarbanes-Oxley; should there be a Facebook-Nasdaq act to require that future IPOs are examined with more scrutiny in an effort to avoid repeating this embarrassment?
If we know anything about Wall Street, it is that it will find a way to screw things up again and will want someone else to clean up the mess. As we are now on the three-week anniversary of the IPO, the stock is down 31% from its $38 opening price.
However, while we are quick to question Facebook's current valuation and point fingers at who will pay for the disappointment, no one is looking into the most important question of all: How did underwriters justify a $38 opening price? How will investors be protected in the future, particularly those who spend hours on Facebook and believe wholeheartedly in "what you see is what you get?"
Perhaps we are now witnessing the only thing that has made any sense throughout this entire sad episode. It not only teaches Wall Street an important lesson in humility, but it also reminds investors that there is no such thing as a sure thing, or that "what you see" can be a façade, absent a considerable amount of due diligence.
As Enron exploited a base of greedy and unsuspecting investors, Facebook's popularity, unlike most stocks, also presented an easily exploitable base of naive investors. This group believes that a great idea not only should be a great investment, but that fundamentals and valuation don't matter. However, a Facebook-Nasdaq act will ensure that everyone's interest is served and greed does not ever precede sound logic.
At the time of publication, the author was long FB and held no positions in any of the stocks mentioned, although positions may change at any time.
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