timezonein: Making Money Cash

Facebook has dominated the headlines today with the news that it has raised $500 million from Goldman Sachs and Digital Sky Technologies at a $50 billion valuation.

In addition, the social network intends to raise another $1.5 billion through a “special purpose vehicle” that Goldman Sachs will be setting up to allow some of its clients to indirectly invest in class='blippr-nobr'>Facebookclass="blippr-nobr">Facebook.

There have been a lot of questions about the Goldman Sachs “special purpose vehicle” since the news broke. The key questions: Why is Facebook choosing to raise more money through Goldman Sachs? Will the SEC allow this move, or will it force Facebook to start disclosing its financial results to the public? And when will Facebook finally have an IPO?

SEC regulations and the nuances of private investment are complicated subjects, so we thought we’d try to clarify some of the issues surrounding the Facebook-Goldman Sachs deal, including figuring out the likely date of the Facebook IPO.

1. Why Are Facebook and Goldman Sachs Creating a “Special Purpose Vehicle”?

There is an SEC regulation, set by The Securities Exchange Act of 1934, that requires companies with 500 or more shareholders to disclose their earnings to the SEC. The SEC then publishes this financial information, making it public knowledge.

Facebook doesn’t want that headache at all. It doesn’t want to go through the audits, create the reports, or let its competitors know the details of its earnings and expenditures. However, the social network still wants $2 billion in fresh resources, so Goldman Sachs has come up with a very clever workaround; instead of having thousands of individual investors, Goldman Sachs will represent them all and invest on their behalf.

This is essentially what most brokers do on behalf of their clients, the shareholders. Instead of making a person an investor of record in class='blippr-nobr'>Googleclass="blippr-nobr">Google, Goldman Sachs will invest money on that individual’s behalf, making him or her a benefitting investor

The New York Times‘ Steven Davidoff provides a stellar overview of the SEC regulations in question, but it essentially boils down to this: Goldman Sachs is helping Facebook circumvent the system so it doesn’t have to report earnings or raise money via an IPO.

2. Will the SEC Allow It?

The SEC isn’t stupid; it knew that brokerage firms would try these types of workarounds. The New York Times dug up the SEC’s definition of a record holder, which includes a provision that says if a company creates a vessel for holding securities of record primarily to circumvent The 1934 Securities Exchange Act, then it will deem beneficial owners as record owners.

In other words, the SEC could deem that Goldman Sachs is circumventing its regulations with its “special purpose vehicle” and thus consider all of the investors within it “record owners” of Facebook. That would mean that the social network would be required to report its earnings.

We think it’s likely that the SEC will intervene. The SEC is already investigating the private secondary markets for potentially violating the same 500 shareholder regulation. It wouldn’t be much of a jump for the SEC to tell Facebook that its investment vehicle doesn’t preclude it from publicly disclosing its financial information. In fact, it’s likely to tell Facebook the opposite.

3. So, When Will Facebook IPO?

Now here’s where it gets interesting. Facebook and Goldman Sachs are setting up this “special purpose vehicle” to raise a ton of cash for the social networking company. They’re absolutely aware that the SEC will not be happy with their arrangement, and they also know that the SEC will likely step in and tell Facebook to disclose its earnings to the public due to the existence of the Goldman Sachs vehicle.

So why would Facebook go through all this trouble when the SEC is going to shoot them down anyway?

The answer is that this move buys Facebook more time to grow and prepare itself for an IPO. The SEC regulation wouldn’t take effect until May 2012 because the SEC only requires private companies to start reporting its financial information within four months after the end of its current fiscal year. So if Facebook violates the 500 shareholder rule this year, then it won’t have to start reporting its earnings until May 2012, 120 days after December 31, 2011.

That’s more than enough time for Facebook to prepare for its IPO. When the day comes that Facebook is required to release its financial information to the public, it will probably decide to just go all-in and become a public company, raising even more money in the process.

Essentially, Facebook has set the clock for its IPO to occur on May 2012 or earlier. Part of the reason we predicted no Facebook IPO in 2011 is because 2012 is the year most of our sources say the Facebook IPO is likely to occur. It all fits.

Mark your calendars and set your watches, everyone: The Facebook IPO is likely coming in 12 to 16 months.

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Jon Cohn notes that the GOP's game of chicken on whether to raise the debt ceiling is pretty goddamn insane:

And the alternative—failing to increase the debt ceiling? What precise effects would that have? This isn't my area of expertise, but my colleague Alex Hart knows a thing or two about it. Here's what he wrote last week:

Recent history provides a sense of just how scary this would be. “The reason the markets calmed down [during the financial crisis] is that we took [the banks’] toxic assets and handed the financial institutions Treasurys,” says Kevin Hassett, a scholar at the American Enterprise Institute. “If we’re in a default situation, the Treasurys themselves are the toxic assets, and it’s not clear what we can hand anybody to calm them down.”

The sad thing is, Graham seems to grasp this: In the same interview, he notes that default could be catastrophic. But that's not stopping him from making his demands. And that's particularly disheartening, since he is supposed to be one of the more reasonable members of the Republican Senate caucus.

And this is precisely why the Democrats should (but certainly won't) call the GOP's bluff on the debt ceiling. Look, the Masters of the Universe have parked a lot of cash in treasuries over the past few years since t-bills are traditionally one of the safest investments around during times of extreme uncertainty. If the GOP puts the United States into serious risk of defaulting, the Masters of the Universe stand to lose a lot of money as the treasuries they've purchased become as toxic as Greek or Irish debt. This is why the GOP's Wall Street overlords will never, repeat never, tolerate them playing around seriously with raising the debt ceiling and it's why the GOP will cave if Obama and the Democrats stick to their guns (which they won't, incidentally, as many of them actually will welcome the GOP giving them political cover to slash Social Security and other key programs).

But would the GOPers really risk losing countless sums of money for their masters if they created a sovereign debt crisis? Sorta doubt it. And it's worth letting them try simply to watch them slink away in defeat.

Onto more economic news!

Felix Salmon depressingly notes how Larry Summers will likely be replaced by yet another rich person with strong ties to Wall Street:
From today’s WaPo report it seems that the shortlist to replace Larry Summers at the NEC has been whittled down to three men — Gene Sperling, Roger Altman, and Richard Levin. [...]

[T]hey’re all multi-millionaires with close ties to Wall Street. None more than Altman, of course, who has his own bank. But Levin is on the board of American Express, which paid him $181,362 in 2009, and where he has shares and “share equivalent units” worth $539,000. Which might not be a huge sum compared to the $1.5 million or so that he’s earning at Yale, but is still more than enough to make him a denizen of Wall Street rather than Main Street.

Finally there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street. The other two have well-defined and easily-understood jobs; Sperling, by contrast, signed up with the Harry Walker Agency and started giving speeches to anybody with cash, including not only Citigroup but even Allen Stanford. He also wrote a monthly 900-word column for Bloomberg for $137,500 a year, which works out at about $13 per word. Then he started “advising” Goldman Sachs on its charitable giving, which advice came very expensively indeed:

Goldman Sachs paid Sperling $887,727 for advice on its charitable giving. That made the bank his highest-paying employer. Even Geithner’s chief of staff Patterson, who was a full-time lobbyist at the firm, did not make as much as Sperling did on a part-time basis. Patterson reported earning $637,492 from Goldman Sachs [in 2008].

Well, peachy. If there's one thing America needs, it's a another person who used to be on Goldman's payroll making key economic policy recommendations.

Brad DeLong gives it the old college try and insists that Sperling is actually a liberal, but to me this isn't even about standard left-right ideology anymore but about whether people have bought into the idea that the Great Wall Street Casino is a sustainable economic model. Sperling could be a perfectly nice guy who really wants to help people get affordable health care and good education, but as long as he thinks Wall Street's Ponziconomy is the best way to generate wealth in this country, he should have no business influencing national economic policy.

On a more positive note, there has been some legit good economic news over the last couple of weeks. Initial jobless claims dipped below 400,000 for the first time since 2008 last week and we got word yesterday that manufacturing is picking up steam:
Manufacturing activity expanded for a 17th month in a row in December, rising to the highest level in seven months, a purchasing managers' group said Monday.

The Institute for Supply Management's index for manufacturing activity ticked up to 57 in December. That's the highest reading since May and up from 56.6 in November.

The reading came in slightly lower than the 57.3 level expected by a Briefing.com consensus of economists. Any reading of more than 50 indicates expansion in the sector, and the index has remained above this mark for 17 consecutive months.

For the first time in forever, you can see real-life green shoots for the economy. Of course, several things could quickly derail any recovery this year (see: refusing to raise the debt ceiling) so let's keep our fingers crossed.

And for what it's worth, the fake economy is also doing well right now, with the Dow closing in on 11,700. This doesn't mean anything to the millions of people who can't find a job, but the media seem to think it's the most important economic metric EV-ARRRR so there you go.

What else is happening, peeps?

surface encounters macomb surface encounters

Thursday, January 6, 2011

Making Money Cash

1. Why Are Facebook and Goldman Sachs Creating a “Special Purpose Vehicle”?

2. Will the SEC Allow It?

3. So, When Will Facebook IPO?

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