What Botched the Facebook IPO?

Investors are being hurt by “the endless financial engineering” on Wall Street, said Jim Cramer on CNBC’s “Mad Money.”


“I’d argue that financial innovation and financial engineering are the bane of your financial existence,” Cramer said. “They have caused more havoc and done more damage to your nest eggs, as well as to the capital markets, than anything else I’ve ever seen in my entire life.”

Take the Facebook IPO, for example. Those who run the Nasdaq put too much confidence in hardware and software, Cramer said. In turn, he thinks the Facebook IPO was a “disaster.”

Morgan Stanley may have misjudged the demand for the deal, Cramer said, but that’s just a case of getting the pricing wrong — an unpleasant, but common occurrence on Wall Street. The deal needs to be priced right for both buyers and sellers, Cramer said. In a perfect world, the sellers ring the register to raise money, but not at such an exorbitant price that the buyers can no longer buy.

“For all we know, with Facebook’s $42 opening, they might actually have done it right, and people are just fuming about the IPO process, which is why it went down $4.20 today,” Cramer said. “But if the deal were priced at the lower end of the $35 to $38 range, I think there would have been plenty of buyers and it could have worked just fine — if it weren’t for the machines.”

Cramer explained that the Nasdaq trusted its computers to match up trades, but it failed.

“We can call it a glitch. We can call it anything we want, but the simple fact is financial innovation was allowed to override common sense and the deal was blown,” Cramer complained. “It’s a black eye on the Nasdaq – a bad one – and it will serve once again to drive individual investors from the markets because the individual investor is already at her wits end about the market’s failure to work right.”

This kind of “financial wizardry” can be blamed for a long list of blunders on Wall Street, Cramer said. It seems financial engineering has been the root cause of everything from the gigantic trading losses JPMorgan Chase reported earlier this month to the “flash crash” of May 2010.

Unfortunately, it’s not likely financial engineering will be reined in any time soon. The U.S. government doesn’t understand the problem, Cramer said, while the banks just don’t care. After all, the products of financial innovation carry many hidden fees that make them too profitable for banks to ever give up.

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