Sunday, January 23, 2011

Goldman, Facebook and its implications for current asset-level disclosure

Over the last couple of weeks there have been numerous comments about Goldman's private investment in Facebook and its subsequent resale of this position to investors.  Gordon Crovitz's column in the Wall Street Journal related this saga to the issue of disclosure. [emphasis added]
Facebook raised $500 million last week, but the only people who could invest were the wealthiest private clients of Goldman Sachs. Instead of offering shares to the public, Facebook chose a private version of a public offering.
The case of an unsocial Facebook should be a wake-up call about how regulations have undermined public markets. 
... In this context it is useful to recall that for the past century the public stock markets set a vibrant, pre-Internet example of social media combined with crowd sourcing: People gathered information on companies and through their trading moved share prices. This combined wisdom rewarded good companies and punished others.
"Nobody in Wall Street knows everything," explained William Peter Hamilton in his 1922 classic, "The Stock Market Barometer," which focused on the investment theories of Charles Dow and his Dow Jones Indexes. Hamilton, then editor of The Wall Street Journal, described how information flowed through the still-young U.S. stock markets, which had funded utilities and industrial companies: "The market represents everything everybody knows, hopes, believes, anticipates, with all the knowledge sifted down to . . . the bloodless verdict of the market place."
Private markets close off this exchange of information, making it likelier that prices are wrong, letting bubbles brew.   
... Until recently, U.S. capital markets were the world's most open, public and well-informed. A free flow of information can't eliminate booms and busts, but as we saw a decade ago, companies in fast-growing industries such as the Web can be the quickest to implode—so the more public information about them the better.
The goal of securities regulation should simply be to ensure that accurate information gets to the market as quickly as possible. By this measure, the regulations of the past decade have undermined public stock markets and their vibrant flow of information about companies.
Not surprisingly, the same conclusions would apply if the discussion had been about bonds and structured finance securities were substituted for private investments.  After all, Wall Street wants the lack of disclosure in private investments and structured finance securities because it makes it easier on them to make a profit.

Mr. Crovitz wants accurate information to be disclosed to the market as quickly as possible.  This is the current asset-level data for both financial institutions and structured finance securities discussed on this blog previously.

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