NEW YORK, May 23 (DPI) – Not long ago Wall Street firms would underwrite stock and bond offerings, trumpet their successes and downplay their failures, and move on to the next deal.

The world — or the politics of finance — doesn’t quite allow that anymore.

With fanfare Morgan Stanley won the prestigious, potentially profitable — and high-risk — role to lead underwrite the Initial Public Offering of Facebook, beating out rivals Goldman Sachs and Merrill Lynch.

But since the offering was launched last week, Morgan Stanley is getting smacked around for its handling of the Facebook deal, which in its first few days traded down about 15% and suffered some electronic setbacks at the hands of NASDAQ’s trading system.

The media, Washington regulators and an edgy public, already resentful of hundreds of Facebook employees getting wealthy overnight, piled on Wall Street’s marquee transaction of 2012, citing it as further proof that the capital markets — and capitalism itself — are rigged.

Moreover, the Securities and Exchange Commission this week acted as though it had discovered something new and sinister about Wall Street business practices — that major investment firms  share some of their better intelligence with preferred clients, major investors who do business with the investment houses every day.

The SEC is now investigating Morgan Stanley, according to CNNMoney, “about whether certain investors received privileged information ahead of the offering that should have been disseminated more widely.”

http://money.cnn.com/2012/05/22/markets/facebook-ipo-morgan-stanley/index.htm?hpt=hp_t1

In the current not-so-brave new world of finance, Morgan Stanley may be fined by securities regulators for engaging in the very practice that keeps Wall Street firms, law firms, subscription publications, marketing firms, and even think tanks in business:  Selling their thoughts.

The SEC may have a difficult time finding any pattern different from what Wall Street’s done the last 50 years:  Some analysts of the investment firm publicly promote a transaction, citing its potential, while others address the potential downside.

That ignores the obvious risks of underwriting securities deals. For years stock and bond underwritings have been a bit like threading a moving needle.  Underwriters promise a fixed amount of capital to a corporate client, and then assume the risk of making a market and distributing the shares to investors large and small. Variables include the cost of getting the deal done, and the cost of securing the underwriting business, always a competitive process, even more so for huge and high-profile deal like the Facebook IPO.

Then there is the direction of the underlying market, a key factor as shares are distributed during the so-called syndication process, and thereafter, when they trade in the open market. Yes, underwriters can hedge some of theirs risks by purchasing derivatives correlating to a relevant market, but that’s never perfect and risks remain.

In the case of the Facebook IPO, there’s added pressure, since it’s a high-profile deal, and it’s ultra-high risk in terms of both prestige and finance.

Wall Street firms will often buy that  prestige with the financial promises they make to corporations to secure the business — which, sometimes, will lead to losses.

In bringing FB to market, too, Morgan Stanley had to deal with broader issues:  Skittish stock markets, a shrill and hypersensitive media and politically overwrought regulatory environment all contributed to the extra risk.

Facebook common stock is barely a week old — no time to really assess it, except perhaps the accuracy of its offering price. But that comes with the role and risks of underwriting.

Much of Washington, the media and the public have apparently grown so averse to risk, that the potential for failure is too much to cope with. The high-minded argument that small investors somehow got fleeced by the Facebook IPO is simply not supported by the facts — more institutions bought shares than individuals at the $38 initial price.