Mr. Ebersman appears to have badly misjudged the demand for Facebook’s I.P.O. He was aided by errant advice from a cadre of banking advisers, who all had an incentive to sell as many shares as possible at the highest price possible.
Ebersman fell into the same trap millions of investors do every day: trust their Wall Street advisers WITHOUT considering they may have a very significant conflict of interest. In hindsight, the conflict here is clear as day. What was right for the investment bankers (more shares at a higher offering price) was very bad for Facebook investors, employees and ultimately the company, itself.
Clearly, Ebersman overlooked this conflict in taking their biased advice… as did investors in Morgan Stanley’s mutual funds. Here, too, in hindsight it’s easy to see that Morgan put it’s own interests far above the interests of another client, it’s mutual fund investors.
Morgan stuffed its funds with Facebook stock while the bank was short-selling it for its own account. By stuffed, I mean they made Facebook the largest holding in the funds at the IPO. And by short-selling I mean they took the other side of the mutual funds’ trades.
All in all, Morgan profited handsomely from the short sale while their funds got hammered by the disastrous performance of the IPO. Who’s to blame? Morgan? You know what they say: “if you know it’s a snake when you pick it up, don’t be surprised when it bites you.” Blame the investors for trusting the snake.