the_goldman_sachs_facebook_deal (1)

the_goldman_sachs_facebook_deal (1) - The Goldman Sachs...

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The Goldman Sachs Facebook Deal: Is This Business as Usual? Published : January 19, 2011 in Knowledge@Wharton Just six months after paying a record $550 million to settle a federal fraud case, Goldman Sachs finds itself in a new controversy over an investment in Facebook, the social networking site. The firm's plan had been to raise about $1.5 billion for the social networking company by allowing individuals to invest in a special fund that would count as a single investor. Some critics say the deal was designed to skirt securities regulations and is marred by conflict of interest, while others argue this type of investment puts taxpayers at risk, since Goldman can support its business with cheap government loans. Amid these criticisms, Goldman abruptly changed course on January 17 and announced that, contrary to the original plan, U.S. investors would be barred from a Facebook private stock offering. Many observers saw the move -- limiting investment to foreigners -- as a serious embarrassment, if not an admission that Goldman had been treading too close to the regulatory line. Despite the controversy, many experts note that it is not unusual for a big Wall Street firm to take part in deals not open to ordinary investors. Nor is it unusual for such firms to wear multiple hats -- investing their own money in deals also marketed to clients, underwriting stock offerings while evaluating stocks for investors, or managing money for corporations and their executives while doing other business involving those firms. So, is the Facebook deal business as usual -- or is it crossing the line? "Investment banks are always looking for innovation; they're always looking for new markets," says Wharton adjunct finance professor David Wessels . Often, he notes, that means looking for "ways around existing regulations. ... They are paid to be creative." But, he adds, Goldman's use of a special purpose vehicle for the Facebook deal is unusual. The vehicle is similar to a small mutual fund that will only own Facebook shares. The fund will count as one Facebook investor, allowing Facebook to avoid regulations that would require detailed financial and accounting disclosures if it had more than 499 shareholders. This approach, says Wessels, "might follow the letter of the law but it certainly doesn't follow the spirit of the law." (Goldman did not respond to requests for comment before Knowledge@Wharton's publication deadline.) 'Private Placements' Complaints about the deal are not as severe as those involving last summer's Abacus case, where Goldman was accused of urging clients to buy securities that were designed to fail. Those securities were created for a hedge fund that wanted to bet the mortgage market would decline. To work as planned, the securities had to be sold to investors who would bet the market would go up. Still, the Facebook deal was somewhat out of the ordinary from the start, even though Wall Street firms
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This note was uploaded on 02/17/2012 for the course FIN 4504 taught by Professor Banko during the Spring '08 term at University of Florida.

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the_goldman_sachs_facebook_deal (1) - The Goldman Sachs...

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