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Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

economix.blogs.nytimes.com

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Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#21

Post by shawnee_ »

There are two things that make this particular case so interesting.

(1) Facebook is still technically a In 1964, regulators started requiring companies with more than 499 shareholders to publicly report their financial results. (source: http://dealbook.nytimes.com/2011/01/05/the-500-investor-thre... ) Facebook isn't there, but if EVER there were a case where this old-fashioned rule should not apply, it would be here. Goldman-Sachs IS (indirectly) benefiting from a "free" pool of money that comes from taxpayers. It's no longer a private-company issue.

(2) employee-owned shares typically do not count toward the 500-investor limit. But once those shares are sold on a private exchange — often after employees leave the company — they are no longer exempt. This is interesting because Facebook has "1700+" employees, which is far more than the kind of small "we need protection" private companies that the 1964 rule set out to protect.

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#23

Post by bwanab »

All posters, except thrill, seem to have fundamentally misread the article. It isn't about Facebook or GS for that matter. Its concern is that several banks including GS have a "too big to fail" subsidy. That subsidy is an implied insurance against failure. Let's say you are GS management and you have two possible investment choices: 1) A safe boring sure thing financed with little leverage that will bring in somewhere between 5% and 10% yearly return, or 2) A speculative leveraged investment that would bankrupt the company if it failed, but would make 50% a year if it succeeds. Which would you do? If 2 fails, the taxpayers pick up the bill and you can try again, if it succeeds you get substantially richer. This isn't capitalism in the sense that you learned in school. It's crony capitalism of the sort that the US has always rightly criticized in "other" countries. It doesn't make it right when it's practiced in the US.

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#24

Post by spinlock »

I think a better title would be: why are we pumping up the next bubble with debt rather than equity?

I don't really worry about Goldman Sachs or Facebook. They are both best of breed and they handle themselves very well. The real danger here is that we are entering an era where risk capital is being financed through the debt, rather than the equity, markets. This is entirely inappropriate as most risk capital is lost and the 10% or so that does return is supposed to make up for the other 90%. Can you imagine how bad the current financial crisis would be if 90% of real estate was not just underwater but completely worthless?

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#25

Post by kragen »

ximeng wrote: post #13
kragen wrote: post #8

Even if Facebook's valuation isn't a bubble valuation (as I've argued previously) it is certainly the case that money lent at excessively low interest rates will create bubble valuations. What can you do about it? You could stop accepting dollars, I suppose.

Buy gold: http://www.kitco.com/charts/popup/au1825nyb.html

If you can buy gold with dollars lent to you at excessively low interest rates while the taxpayers shoulder the risk that gold prices might crash, that would be a viable way to take advantage of the situation.

But I was asking how to improve the situation. Does buying gold improve the situation in some way that is not obvious to me?

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#26

Post by gruseom »

grav1tas wrote: post #10
thrill wrote: post #7

Earlier quoted context omitted.

GS (and other favored companies) doesn't need to actually borrow - they gain advantage by having access as needed to 'government money', better defined as coercively (you know - prison if you don't give it) acquired taxpayer money. Merely having that access is the advantage - they can take greater risks - and reap greater rewards - than others because of it.

Laissez-faire capitalism at work! No really, can somebody explain why institutions like this are allowed to have such advantages over their competition? This seems like it would be an easy political target FROM ALL SIDES of the aisle. "Big government" messes with the "free market" and the "rich get richer". ::EDIT:: Since I can't respond to my sub comments at this point, the first sentence, is, in fact, sarcasm.

No really, can somebody explain why institutions like this are allowed to have such advantages over their competition?

That's easy: capturing of the political process by large entrenched players.

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#27

Post by kragen »

spinlock wrote: post #17
3pt14159 wrote: post #9

Short version: Anything Goldman invests in is being subsidized, so Facebook is being subsidized. Yawn

Accurate version: Goldman finances its operations through debt rather than equity because of it's explicit federal backing. The risk capital it is investing in Facebook is therefor debt rather than equity. Facebook is so hot right now that it is probably overvalued. This leads to a debt bubble - rather than an equity bubble - which is much more painful for the economy.

Has someone actually made the case that Facebook is overvalued? My calculations suggest that its valuation is reasonable: http://news.ycombinator.com/item?id=2062222

That isn't to say, of course, that it's reasonable to finance buying its stock with implicitly-taxpayer-guaranteed loans. The calculations I linked above suggest that Goldman thinks there's a very large chance that this investment will turn out to be worthless.

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#28

Post by ximeng »

kragen wrote: post #25
ximeng wrote: post #13

Earlier quoted context omitted.

Buy gold: http://www.kitco.com/charts/popup/au1825nyb.html

If you can buy gold with dollars lent to you at excessively low interest rates while the taxpayers shoulder the risk that gold prices might crash, that would be a viable way to take advantage of the situation. But I was asking how to improve the situation. Does buying gold improve the situation in some way that is not obvious to me?

As gold supply is relatively fixed, it's harder to manipulate than valuations of internet companies. Spending dollars on gold rather than stocks will reduce the stock bubble risk and reduce price for dollars (measured in gold / $), so reducing your vulnerability to dollar bubbles caused by government policies.

It's not perfect but it's a form of insurance. Based on recent gold prices, it looks like many people are taking that insurance.

Essentially I'm agreeing with you - stop accepting dollars, use gold instead.

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#29

Post by hessenwolf »

spinlock wrote: post #24

I think a better title would be: why are we pumping up the next bubble with debt rather than equity? I don't really worry about Goldman Sachs or Facebook. They are both best of breed and they handle themselves very well. The real danger here is that we are entering an era where risk capital is being financed through the debt, rather than the equity, markets. This is entirely inappropriate as most risk capital is lost…

Most risk capital is lost? We hold risk capital for a 7bp event (99.93% chance the situation will be better than this). Then we have prudent margins. Why the fuck would we burn through 90% of our risk capital most of the time?

Re: Why Are Taxpayers Subsidizing Facebook, and the Next Bubble?

#30

Post by hessenwolf »

ximeng wrote: post #13
kragen wrote: post #8

Even if Facebook's valuation isn't a bubble valuation (as I've argued previously) it is certainly the case that money lent at excessively low interest rates will create bubble valuations. What can you do about it? You could stop accepting dollars, I suppose.

Buy gold: http://www.kitco.com/charts/popup/au1825nyb.html

I hope you are being ironic.
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