free media. people. top headlines. good afternoon and welcome to capital account i'm laurin the star here in

washington d.c. these are your headlines for friday may twenty fifth two thousand and twelve it has been a week since facebook's disaster day view we've now seen shareholder lawsuits subpoenas not to mention a whole lot of mind numbing news coverage and what was an over the valued i.p.o. price that's at the core of it but why did so many people miss this in the first place even though there was plenty of evidence to indicate it. could not be to blame reggie middleton will be on the show to talk about it remember he laid out all of the problems with facebook's valuation on this show long before the i.p.o. and mother aside this facebook case may be illustrates some problems with this. very very. you know. i'm talking not about fighting actually i'm talking about the chinese wall the one

that's supposed to exist and wall street firms separating research analysts from investment bankers and i want you to remember washington tore down this wall entirely in some cases it appears going forward with the misnamed jobs act we'll talk about it and this is a perfect day to bring back the very in demand word of the day it is herd mentality and it doesn't pay to follow it will explain why let's get to today's capital account. it's been a week since last friday when the facebook i.p.o. shocked retail investors when one of the biggest stock offerings to ever hit wall

street was a major disappointment you can see some of the headlines there that were hyping it ahead of the i.p.o. saying that facebook was meeting the hype with its valuation well how wrong that turned out to be at i.p.o. to thirty eight dollars per share it closed just under thirty two dollars today that's not usually the case with the hottest i.p.o.'s ever now there are questions about crucial mistakes made by nasdaq the exchange where the i.p.o. was placed but let's leave those aside for the moment because what's more interesting to us are questions surrounding whether analysts cut expectations during the road show because they learned new disappointing information about the company's outlook but only told privileged institutional investors about it meanwhile mom and pop investors were in the dark left to buy the stock at the offering price like suckers now this aspect has resulted in senate scrutiny shareholder lawsuits subpoenas from regulators and a lot of brouhaha here's the thing though stepping back. i'm sorry no one was

forced to buy facebook stock no one was you know they had to hand over their money at this price to buy this stock and no one was shut out from reading plenty of analysis or doing due diligence of their own to find that facebook was not a great deal to begin with reggie middleton is an independent analyst he called this exactly he laid out all of the reasons why facebook was overvalued at its offering price on this show weeks ago and on his blog for much longer meanwhile facebook's valuation the interest in the stock along with perhaps images of mark zuckerberg getting a rock star reception during the road show created this impression that facebook was the hottest i.p.o. to come along for a while so is reggie just that much smarter than the people that were pricing this stock and offering it not to say that he has it but could it also be summed up by

this something he writes about. the study of how to rip your client's face off or screw your client that's one way you could look at it but here to talk more about the details is reggie middleton entrepreneur best entrepreneurial investor excuse me a very popular boom bust blog and very accurate predictor of what was an overvalued price for facebook first so first of all reggie thanks so much for being on the show let's do a little victory lap congratulations on getting facebook so right. it thank you very much you know the cover was good to have you with. i know the feeling of likewise here reggie you know we now see lawsuits from shareholders a lot of retail investors upset feeling like they got duped by all of the hype surrounding facebook but reggie isn't the bigger picture here aside from the regulatory issues that people need to do their homework and not just buy

into hype. exactly you know facebook was a method question a math question and even if you aren't good at math you can use simple common sense remember that someone is going to show you how to use facebook you said you weren't even on it you know about all your friends some much money they spend on it now much you know even if you don't know the analysis going through income statements about she's cash flow statements etc you do know that in order to be worth something has to make money how does facebook make money if you don't know anybody who's ever spent money on facebook then you know it should be considered risky stuff despite that you know you had a road show with very very success people you know the two morgan banks as well as goldman sachs and you had a very good story stuff you know company that everybody use but nobody ever gave money to put those two together you had a lot of hype a lot of froth and you know it turned out it was a lot of hype

a lot of false but this starts because i saw through it since it launched right let's get into some of these issues because with so much hype surrounding it and it being a story stock the way that you've laid out on this show before is that why there was so much demand an interest from retail investors or were there other factors too are there you know there are financial brokers saying oh you got to get in on this you know what factors do you think really went into the interest among retail investors aside from being a story stock. bifurcating you know first at the story stock and then you had the underwriters who are doing a job you know their clients the corporate and cities that are going public facebook is the goldman's client stand his client and j.p. morgan's client and they did their job which was to get the maximum amount of capital to the private shareholders as possible when the copyright public and thirty dollars was probably the max and they could have ever possibly gotten now

whether that has anything to do with the actual value with the shares is a totally different story you know remember price does not equal value you know that it was but something's worth price is what you charge somebody for. what is did their job from their perspective now the problem is and this is a conflict the underwriters happen to be the same corporate entity the same and city and that the advisers are that. mr mom and pop and joe schmoe and even institutions want to buy and you have two people on opposite sides of the fence you know advising the two different clients with a guarantee conflict of interest and that showed it right here and there there is no end of this that should have had a buy or even a hold on facebook stop if i could see was just a global value then goldman sachs and other could see them up the standings and they could team with hundreds of employees of thousands of employees and maybe a four hundred million to a billion dollar budget could have start you know if they can see it another two

hundred rescue seen it so you know everybody that should have i.p.o. with the celebrating at thirty dollars should i.p.o. to the serving at thirty two dollars or thirty or even twenty nine the fact that there was in a cell means that you had a significant conflict between the so-called analysts and the salespeople which are the underwriters so in essence you don't really have an. expression with underwriters they have a little. department you know they're not sure that's what they are still support staff. you know they're there to support the sales and trading staff. now of course that's taboo word in the program give them a lot of nasty e-mails but prove me wrong by you know possible while there's a dare for any of our naysayers in the audience so just to be clear because there is supposed to be a chinese wall between investment bankers and analysts within those banks you're saying there's no chinese wall here these analysts are pushing the stuff like a. small like a china town wall you know we decided to end these will. you know if there was

a chinese wall then as i said and he and the local staff work through their metal you know who even had access to a spreadsheet or a pencil and paper and they could have figured out that facebook was overvalued so if there was truly a chinese will you have them of the staff at odds with the sales staff ok but there is no chinese wall because of this chinese will there's a big chance of coming communicated this you know present information back and forth that made them a little stale cooperate with the sales that. you know they'd say the same thing i would you know you have to be a genius you know they did and how many people do you know that gave money to facebook yeah none not any unless maybe you play that farmville game or you know give money to which and which gives it to facebook but that aside reggie so are you saying that these sell side analysts they're not they're not just bad at their job they're purposely not doing the job of accurately estimate ing any of the metrics

in order to indicate that this was an overvalued stock they are simply go ahead of you looking or say basically that they have a vested interest in not doing good accurate work. the analytical staff or the underwriters that we have the vested interest don't want to you know paint a broad brush on all and there's a lot of hardworking so scientists and they try their best to do what they can but you know and this is that basically coggs in the machine if you get too accurate too often and you come into conflict with the real moneymakers which was the transactional and the agency revenue streams and then you got to be as the the data down are you going to be as three well combination of both so you know there have their hands tied you know if you take a look at all the pills that have been you know floated over the past year and a half see how many pills that were floated with this and a little staff saying that is the sell at the i.p.o.

day you know try and find one you know it would be very difficult to go and buy something from and then city with the other side and saying you know so your food you know. i am in this in underwriting for you score salesman where you go to of course so that you figure up on the call and say i need inspection the car came presence but because for me before he said to me you know what it's supposed to see right you know it's extreme conflict of interest extreme right well and also there is the aspect of because i used to work in equity research i worked for an independent firm that was very contrary and and chose to do very good work as opposed to just cozying up to management teams and getting access and regurgitating management spin which was what our firm believed sell side analysts did because the benefit to them of their job was not necessarily to do the best analytical work but to have good relationships and access to management that clients of the firm want to do is that would you disagree or agree with that. i mean that's it in the shell

and the issue is you don't necessarily need good relations with the management to analyze the firm it does help ok but if the management is not motivated to give you the whole picture. right and. again that picture then you know sometimes axis imagery can color perception yeah you know i've analyzed i've called the fall of most of the major brings me insurance co breeze you know of sovereign nations etc i did it without having access to any of the management you know the talk to the manager to not two plus two is always going to fall and that's the math is wrong right it doesn't matter if you know that you know the magic up you're not math is math and it's probably better because then you don't have that conflict of interest of wanting to keep that good relationship so being afraid to say something bad you have the independence to call a spade a spade regimental ten when we come back we're going to talk more about the regulatory side of this because that is an aspect of this story that i do want to

touch on we'll have more after the break with reggie middleton entrepreneurial investor also still ahead it's back by popular demand the word of the day and i'll respond to your comments and your feedback too but first your closing market numbers. sometimes you see a story and it seems so you think you understand it and then you glimpse something else. part of it and realize that everything you. are welcome is

a big. thank you. welcome back we're talking facebook with reggie middleton who we're doing a little victory lap with because he called this ok he did his homework he's a good analyst he said facebook was overvalued gave a million reasons why maybe not a million but a lot meanwhile just like sheep to the slaughter people got creamed by the stock they poured into it so we're talking about some of the conflicts of interest that may have resulted in this hype between underwriters and analyst with these massive wall street firms that take companies like facebook public but also there have come

up with this issue becoming to light some of these rules surrounding i.p.o.'s that sound like they benefit the big guys and really do not benefit the little guys that got really crushed with facebook so let's bring back an entrepreneur investor author of boom bust blog because i want to get his take on that aspect of the facebook now reggie i know that this is been all talked about everybody's been covering facebook and so shocked that it did what it did with the i.p.o. this is one of the only things that out at cocktail parties friends have asked me about because in washington people aren't as into finance is where you are in new york but everybody is intrigued by this facebook story which i think gets to what you were talking about which is that this is a story stock average people care and we're interested in this so i guess a question for me because you know a lot of people are talking about that analysts now reportedly cut their estimates midway through the road show which was a big deal there they had a weekend outlook and this was reportedly relayed to them from facebook's management team possibly anyway they only told some preferred clients and

institutional investors and obviously that inconveniences or disadvantages the small guys but there's evidently some rules that you are allowed to do that with institutional investors and the reason is that they're sophisticated enough to handle that information and know how to use it whereas you know joe schmoe down the street can't is that an unfair. you know i was tempted to just cut you off and say stop before you finish because you know there's been so much b.s. one person can swallow at one time if someone tells you you know there's someone tells you you know this company is about is not going to make nearly as much money as we thought it's going to make you know so you should so that should buy ok do you need to be a sophisticated investor to be able to handle or want that information or would any everybody who's going to buy the stuff want to know that the stuff that is valuable as it was once hard to be in you know is said to have been you know that's absolute nonsense you know if you walk down the street and someone says it's about the rain you know his umbrella do you mean that only and so my big big clients will be six

foot tall because they can handle umbrellas why does everybody want to hide from the rain you know that that's absolute nonsense and you know the be truthful if it does go to court hopefully you get a judge you know in the jury who believe in equity and that necessarily that particular letter of the law because right is right and wrong is wrong you know it's just that simple you know who wouldn't want to know that facebook is on but it will is the state it was right no i mean everybody would want to know that everybody that wants to know you know what people are officially saying within these firms and don't want to you know look at some independent analysis but that aside. the question for me is with something like facebook and all of these issues that have that are surrounding it we have also seen regulations passed and laws passed the jobs act was signed which rules back a lot of these rules surrounding i.p.o.'s for smaller companies emerging growth companies that have brought in one billion dollars now on its face you say hey well those are a lot of investor protections but we're just talking about

a quote unquote investor protection that only protects big institutional investors and not the small guy so could rule rolling back some of these i.p.o. rules and regulations actually be a good thing that benefits just individual investors. either rule them back or make them realistic you know you don't protect the investor by you know everybody should do their own homework ok nobody should be protected against you know. it is basically you know if you don't do you keep it a price for not doing homework if you want to protect an investor you make sure you eliminate conflicts of interest you make sure you eliminate the tenets of fraud if not for it itself is not punished you know you do things that the investor cannot do for themselves and the rest that should be if you can come in should be invited in investing in stocks which you cannot do if you cannot perceive the limits of the constraints of the extents of the conflicts of interest within the corporation you know and so that's something that is you see these two you know do things for the investor that they can't do themselves and let's not pretend that people can we

can't absolutely and the moral of this story to is read count don't just accept that the emperor is wearing clothes if the emperor you can plainly see is naked reggie middleton thanks so much for being on the show and for again so much it is great but ok i like to just say you know you are probably one of most particularly those. persons that i avoid your competition and i just found out that used to report independent sell side by side from what yeah analytical from since you know so it all comes together you know your situation and loquacious this is attractive so i'm sure your audience agrees thank you and that's the nicest thing i've ever heard in a link in a very happy friday for me thanks so much that's reggie middleton entrepreneurial investor.

all right we thought today was a great day to bring back by popular demand word of the day where we break down a financial term or concept for our very smart viewer but maybe just not the financial expert not the reggie middletons of the world today given what we're talking about with our guest herd mentality now why we're talking about this should be self-explanatory but if not let's recap remember the headlines facebook valued at record breaking stock market debut one hundred four billion dollars retail demand for facebook risks inflating i.p.o. because there was so much interest in it so the hype is just one of the reasons why we're talking about herd mentality let's move on to what exactly herd mentality is ok when hype doesn't lead to anybody's expectations maybe herd mentality was at play ok it's a financial term what does it mean it describes how people are influenced by their

peers to adopt certain behaviors follow certain trends it's the observable tendency of people to conform to what the group is thinking or doing irrespective of their own instincts psychological experiments most notably that ash conformity experiments published in the fifty's have been done to demonstrate this behavior of the ash experiment when a little something like this this. has apparently been. that guy confer forms now that was just a parody but the real ash lab studies showed how subjects when given a test with a group even though they knew the correct dancer they actually gave the wrong answer to conform with the incorrect answers of the group in other words they would rather be wrong with lots of people rather than write alone now i should warn you

that the study was only done with male subjects no word on how it would have gone with women but this is something this herd mentality concept is something we see in the markets all the time and it's one of the reasons why bull markets often and they're run in an exponential flameout as the herd of sheep starts to pile on to the same small patch of grassland trampling over one another as they push each other over a cliff or as a herd of sheep think a stock is going to be the hottest i.p.o. we're garbus of evidence to the contrary now in these scenarios it is the independent thinker the person not afraid to break ranks with the herd that comes out on top and if you watch the show chances are you aren't part of the herd but consequences of herd mentality illustrate why that's a good thing and now everybody knows what that means.

all right it's friday that means it's time for some of your feedback bell huey seventy two on the note of what we're talking about said earlier this week why would anyone be interested in buying shares and what i call face plant in these market conditions that is a great question that we've obviously been asking hopefully we've cleared it up and you obviously are part of the herd we can but the issue to bed now but i just had to bring up that wordplay faceplant pretty much sums it all up now also this week we talked a lot about jobs and loose change we talked about the uptick in job listings looking for ninjas and jet eyes we mused on why that would be to hans had a great take on it i thought the ninja jet i terminology in job recruitment for the younger employee strikes me as simply a vanity sale technique used in recruiting to make goal of all employees feel better when they're dumped on with excessive workloads you may be on to something

it's a when you know to jazz it up make everybody feel better about being overworked now we also covered a story about men increasingly taking jobs in female dominated industries and we looked at the gender divide on both sides now bamban twelve wrote regarding men and women in the workplace all i can say is lauren so smart you might as well be a man well first of all very flattering nice compliment i'm glad you think i'm smart but i have to call you are you creating being smart with being a man because if so i think you need to hang out with some more women we talked about how joblessness too in some demographics is higher if you have some college versus none at all now we talked about job growth and and losses. brown five five zero six one wrote on our you tube channel as for job growth tell that to h.p. who is laying off thirty thousand people sad that i have a degree in i.t. and i'm making less than a district manager of mcdonald's l.l.b.

great feel good be grateful if you are employed period and i just wanted to say thank you for writing in because it's important to remember that the jobs crisis is a very personal human one we always talk about the economic side of things the financial side of things i appreciate viewer for sharing the personal side of things now byron and five said lauren in capital account i really appreciate your financial coverage news coverage and analysis but most often it seems that you cover how bad things are and who is getting away with what could you try to do more towards offering suggestions for people to invest and head in this toxic financial environment first of all thanks for the nice words second i wanted to say if you haven't go watch our march twenty seventh episode with chris mayer he's a financial he's author of world right side up and with him we spent the entire show talking about investment ideas and opportunities he traveled the world looking for them finding the good opportunities in these tough and bizarre paranormal times we'll try to do more of this kind of thing in the future though because obviously

you want it and groovy and cow on you to pointed out an error that i made here it is too steady has got our attention we want to bring it to yours first americans work thirty percent more than americans. obviously americans can't work harder than themselves i meant thirty percent are americans work harder then europeans i obviously misspoke funny because we combined that story with one about how americans also are taking their vacation days on a personal note we mused about how at the show some of us don't and after that i received some nice tweets about how we probably should so this is a good time to tell you that we are off for the memorial day holiday on monday no show and with that that's our show for today thank you so much for watching and make sure to come back tomorrow in the meantime you can follow me on twitter out lauren lyster give us feedback at youtube dot com slash capital account or watch as they need to deal on hulu dot com slash capital dash accounts and from everyone

here have a great weekend thanks for watching and have a great night.