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The Goldman Sachs Facebook deal builds the wrong kind of value and will be bad for FaceBook as a company

Nomi Prins worked at Bear Sterns, then Goldman Sachs until 2002.  Her background was CDO (Collateralised Debt Obligations) which later (after she left) became tarnished with sub prime mortgages and were at the centre of the banking crisis.  Goldman Sachs were fined $550 million by the SEC for insider trading regarding CDO.

Nomi compares the FaceBook deal to CDO.  Her central point is that Goldman Sachs have better information than their customers and are in effect ‘making the market’ in FaceBook.  By making the market they provide several opportunities to make large fees and will make those fees no matter which way the market goes.  Meantime the investors are forced into an illiquid position until 2013, except for Goldman Sachs who can exit any time.  Also check out the fees.  Investors are down 10% from the outset – your $2 million is worth $1.8 million on day 1.  Its a great deal for Goldman Sachs.

Goldman’s Shady Facebook Deal | Daily Beast

If you’re one of those investors, here’s the deal in a nutshell: You get to buy shares, forking over 5 percent of any possible gains, on top of a 4 percent placement fee and a 0.5 percent expense reserve fee (so you’re down 10 percent before the game starts) in a private company that doesn’t have to disclose any pertinent financial information to you or any regulator for 15 months. For the privilege, Goldman gets its eight-digit windfall.

Article - Prins Goldman Facebook

Forget their fees for a moment, though. Recall that what killed the CDO market, aside from the crappy deals, crappy collateral and overall shadiness: lack of liquidity. Investors stopped buying CDO pieces, and trading desks stopped making markets in them. Game over. That’s why this deal, albeit in something with more potential than a basket of subprime assets, is worse than a CDO: Investor illiquidity begins on day one. The rich Goldman clients who must pony up a minimum $2 million investment aren’t allowed out until 2013. No exceptions. Ditto Facebook employees (although they were allowed to cash out about $100 million last year). But Goldman is. Whenever it wants "without notice to the fund or investors in the fund."

She goes on to compare the FaceBook arrangement to CDO in more detail.

CDOs were private, unregulated, overvalued, disclosure-lite, fee-intensive deals. The Facebook deal is private, unregulated, overvalued, disclosure-lite, and fee intensive. CDOs sold like mad— until they didn’t. That can happen here. At the end of the holding period, there may be no bid for Facebook shares anywhere near the price paid. Plus, by that time all the enthusiastic global users of Facebook may have dropped it for taking the advertiser money along with them.

Finally the ultimate telling message.  As a raw investment, Goldmans own fund declined to participate.  This further promotes Nomi’s point the Goldman Sachs are doing this deal to extract large fees from their accredited investor (rich customers, who are the only ones that can participate) customers while they (Goldman) build a market for FaceBook shares.  This is all in complete contrast to the Google IPO which promoted fairness and equal opportunity and it did that by bypassing Wall Street.  Gordon Gekko is alive and well.

The Facebook deal sucks so badly that one of Goldman Sachs’ own funds didn’t want a single share of it. Richard Friedman, who runs the money for past and present Goldman partners, among others, said, thanks, but no thanks. That should tell everyone something.

Relevance to Bankwatch:

Its not that I mind people becoming rich.  The larger issue here is that opaque deals with extreme fee structures benefit investment banks, but do little for the larger economy.   They create false value that contributes to bubbles and that always end in crashes like we just saw in 2008.  And after the crash the ones holding the money are the same ones who got the up front fees and bonuses.  This is the opposite of creation of sustainable and manageable value that benefits the broader economy and people at large.  It also means FaceBook as a corporation will be entirely focussed on working to Goldman Sachs pace and not to the benefit of the company’s long term success.

Written by Colin Henderson

January 8, 2011 at 16:25

Posted in Uncategorized

“Facebook has no philosopy” | a comparison to the Google IPO

Much has been written in the last few days about the FaceBook IPO, er private funding.  Umair makes a solid point here and notes that FaceBook is doing exactly what is wrong for sustainable value.  No doubt many will make commissions, including Goldman but is this approach appropriate for sustainable share value.

He goes on to note that by aligning themselves with the worst of Wall St approaches, something Google chose to not do, FaceBook has less chance for creating sustainable real and consistent value for investors.

A Tale of Two IPOs | Bubblegeneration

Companies that have philosophies are resilient–they’re able to weather the fiercest of storms, because they focus on enduring value, not transient gains. What Facebook’s Goldman deal might tell the astute observe of strategy is this. Facebook has no philosophy, no set of guiding principles that focus it on enduring value. Instead, it is focused–as it has been focused–on building an extractive ecosystem rife with subprime economics and tail risk, not creating value that matters, lasts, and grows.

Sidenote:  it is also interesting that the broker side of Goldman Sachs chose to not participate indicating that the valuation is too high.  The bankers know better 🙂

Goldman Sachs Capital Partners — a $20.3 billion group that manages and invests mostly for pensions and sovereign wealth funds — was offered the opportunity to invest $450 million in Facebook, according to people familiar with the matter. Goldman Sachs allegedly allows its Capital Partners unit to get the "first look" on many investment opportunities.

But unit head Richard A. Friedman decided to pass on the Facebook shares, saying the company was a mismatch with his investment criteria, according to the New York Times.

Written by Colin Henderson

January 6, 2011 at 16:39

Posted in Uncategorized

On VRM, Facebook, and being misunderstood for long periods of time

I simply love this post at RWW.  The post is about how FaceBook could turn on the power of their userbase to the benefit of consumer power.  I have long been a fan of VRM and at the same time at something of a loss to see how it could be initiated.  Then I read this post, and new lights went on.

The post is about FaceBook, but it is less about them, than it is about business models for companies with large userbases who insist on following tradigital advertising models. The whole ‘We have lots of eyeballs so lets monetise’ thing.

[disclaimer]  I have long believed that adwords, adsense, and any such interruptive advertising model has only a limited online lifespan, and represent a termproary interlude that keeps SEO types busy in these formative internet times, until we get to the next level whereby the consumer is truly in charge.  Only then will I accept a Web X.0 increment.

I look at myself and my online behaviours, and maybe I am in the minority, but maybe thats because the tools I use are not well understood.  My online experience sees almost no ads except when I choose to do so, and I do so choose.  I see them in emails I deliberately subscribe to, I see them when I seek them out, but my standard web experience is protected by pop up blockers and AdBlock Plus.  If in doubt how many have PVR’s at home, and skip tv ads?

Its not that I don’t want to lknow about products and services.  I just don’t want to know when I am reading, listening and watching things on the web.  This is the power and the promise of the internet medium;  it has the power to be better.  I listen to Sirius Radio for similar reasons; I want to hear music not ads.

Enter Vendor Relationship Marketing (VRM).  Terrible title, but in essence VRM says you will decide when a merchant (vendor) may contact you, ie advertise to you.  Until then stay away. Here is one of the more provocative catchphrases from “The ClueTrain Manifesto” which forsaw this problem and solution 10 years ago.


The challenge is how to move from an interruptive model in radio, television, phone, mail, and now internet to VRM which would require a seismic and complete shift.

“be prepared to be misunderstood for long periods of time.” – Jeff Besos

Back to the RWW post.  Bernard does a nice job of pointing out that FaceBook is taking too long to develop a business model, and is taking longer than Google did.  He notes that it will take a radical shift in order to do that, and that shift will be misunderstood, but give it time.

I agree with Bernard.  The reason FaceBook and traditional advertising doesn’t work is because no-one wants to hear an ad in the middle of a conversation.  However FaceBook has the other benefit (some say weakness) of being a walled garden and Google cannot see inside.  He notes this is the perfect oportunity to turn that walled garden into a powerful tool on behalf of the consumer.  When they feel the need for a product, service or information on them, FB users could, through an RFP (Request for Purchase) process make it known to vendors, even to the point of naming their price or price range.  Vendors could respond.

This turns the ad model on its head.  The playing field is levelled between the merchant and the consumer.  If the merchant comes on stronger than the consumer wishes, or tries to return to old ways, the consumer can ignore them.

Relevance to Bankwatch:

Consider banking – every day thousands of RFI’s emanating from VRM services, and the banks can compete on them, all electronically.  Clearly this requires formats, standards, and defined processes but it makes an interesting future world view, and one that FaceBook could kick off.

Written by Colin Henderson

June 26, 2009 at 12:47

WorkLight® Inc | helps businesses reach customers seccurely online at iGoogle, Windows Live, desktop widgets, RSS readers, Facebook, Apple iPhone

Once in a while something is highlighted to me and catches my attention. Worklight is one of those. It offers widgets that allow customers to view their enterprise information, eg banking, securely within igoogle, or portal of choice.

I like the concept of bringing information to the customer in their destination of choice, and this is one implementation worth following. If anyone has any experience, please share in the comments.

Through WorkLight, people effortlessly get valuable information they desire, such as account status, product availability, or updates about their latest transactions. They can then take actions, for example order products or services, respond to promotions or offers, and consult with colleagues, without having to log into a portal or corporate web site.

Written by Colin Henderson

November 18, 2008 at 13:08

Posted in Uncategorized

MShift, provides SEFCU members with secure, one-click access to online account information from FaceBook

Original use of online banking by SEFCU. Interesting to have an application access from inside FB. It will be interesting to follow the security considerations there.

Finextra: SEFCU taps Facebook

Albany, New York-based credit union SEFCU is the latest financial institution looking to tap the Facebook generation by launching a banking application on the social networking site.

The tool, developed by mobile banking specialist MShift, provides SEFCU members with secure, one-click access to online account information. All data is encrypted with a minimum of 128 bits and no user data is stored on the Facebook servers.

Written by Colin Henderson

July 10, 2008 at 23:09

Posted in Online Banking

Bank advertising doesn’t work in Facebook

In usual form, Jim cuts right to the chase with some stats that simply prove what I believe to be the case that Facebook is first a foremost a social network, not an advertising network. 

That is no comment on Facebooks business model.  I simply question that merely because young people are your target market, that you can stuff traditional interruptive marketing techniques into FB, and they will work.  Jim’s analysis proves that out.

NetbankerOverall, the banking and personal finance apps have anemic usage levels totaling just 263 daily users (for apps with more than 1 daily user). That does not include virtual currencies or stock tracking/investing applications (see note 2). In comparison, the most popular general Facebook app, FunWall, has more than 3 million daily users.

Written by Colin Henderson

March 14, 2008 at 17:25

Posted in Marketing

KeyPoint CU introduces account access via Facebook

In what I believe is a first, KeyPoint Credit Union, based in Silicon Valley introduces a new mobile service via FaceBook.  In effect, this uses FB as a single sign on vehicle.

Finextra: KeyPoint CU introduces account access via Facebook

KeyPoint CU – which serves technology companies including Apple and Google – is the first financial institution to launch account access via Facebook.

The application provides customers with secure, one-click access to online bank account information. The CU says all account information data is encrypted with a minimum of 128 bits and no user data is stored on the Facebook servers.

While I applaud the concept, sign on is as good as the weakest link, and FaceBook’s log in would be easily phished.  Time for caution on this until its better understood, or at least till I better understand.

Written by Colin Henderson

November 15, 2007 at 22:52

Thoughts on Google, FaceBook, and internet evolution

Once in a while its interesting to take a look at general internet trends. Its not banking specific in the short term, but it will be. 

While FaceBook is all the rage at the moment, I am still on the fence, and here is why.  FaceBook is a walled garden determined to produce a private environment with sufficient numbers of participants that will drive advertising revenue.

Google is the antithesis, and regards the entire internet as its garden.  This sets up the ultimate battle between control and openness. 

  • Control:  FaceBook offers an engaging environment where people can interact with each other and with their applications, but search engines/ advertising platforms are shut out, except for the ones that pay, and in FB’s case thats Microsoft
  • Openness:  Google’s strategy is to make the entire internet (except the FaceBook walled garden) so engaging that users will deem open internet more valuable than the quasi private FaceBook.

FaceBook sees themselves as an application platform, while Google sees the internet as an application platform.  Its a classic battle.  This from ZDNet on Google and their approach. 

» Google’s new mantra: Making the Web a better platform for all | Between the Lines |

According to Gundotra, Google is happy to create a more level playing field by giving away core code (not the revenue generating search or ad technology) to application developers. “If the motive is to drive usage on the Internet, it’s ok. We hope users will love to use our products and that they are useful to developers, such as gadgets.”

On the question of a Google browser, Gundotra answered cryptically, “We have a lot of people to make the Web better.” Google might open source technology to browser makers such as Mozilla, Microsoft and Apple, but it’s not clear if they will embrace them. It’s not a big stretch to think of Google reinventing the browser or doing something with the Firefox code if Mozilla isn’t innovating fast enough to satisfy Larry and Sergey dreams for the Web as a platform.

Google is also considering ways to provide infrastructure services to developers. Currently, gadget developers can serve their code of Google’s servers, but the company has been coy about broader usage.

“Google is a world class leader in scale infrastructure, and we hope to apply it to the Web, but we have no announcement at this time,” Gundotra said. It would make sense for Google to provide services to smaller developers similar to what Amazon does with its S3 and Elastic Compute Cloud as a way to bring more innovation quickly to the Web.

This from FaceBook, and their approach which is strategically valid too, being based on user control, and raw traffic from [FaceBook] trusted friends.  I qualify friends because I have to say FaceBook have taken liberties with the english meaning of that word, but nonetheless, there is a raw connection drawn between those that are ‘friended’ which transcends earthbound day to day life. 

» Facebook: Committed to the sanctity of the social graph | Between the Lines |

“We are trying to build the most accurate representation, a digital mapping of how people interact in real world,” Vora explained. She brought the canonical Facebook photo application as the example of how the social graph can work. Facebook Photos isn’t feature rich like other services, but it has more traffic because of the social tagging tied into the social graph.

Photos are propagated as more users tag people and share with their Facebook friends. It’s an indicator of social interaction and the social graph, Vora said.

It remains to be seen where this battle will go, but a battle it will be.  We also have the sheer financial and technological, albeit unfocussed, power of Microsoft and Yahoo to consider.  They are not yet part of the battle because they have no clear strategy in the future of the internet space, but they will be players because of their commitment and size.

Anyhow, people are wrestling with the volume of information and advertising bombarding them today.  They will seek protection in different ways, by basking in the volume or hiding from it.  One question is whether that protection will come from environmental control (Facebook) or personal control (Google).  With that statement I have made my preference clear, but the future is never linear, and as adjustments are made, I see two winning approaches evolving.

On the technology front new tools are in development that support web applications in ways that we can only dream of today.  Prism offers the world of applications within your browser, unencumbered by back buttons, and URL bars.  A scaled down browser with a clear line of sight to the application people want … email, RSS, Calendar, FaceBook even – see here for current applications for Prism.   Prism is relevant  because as a web application presentation it actually supports either FaceBook of Google.  By the same token, those two will never achieve real success unless a Prism or like, vehicle exists.  Its not co-incidence, that Google might be considering taking on development of the Firefox/Mozilla browser. 

Having meanadered all over the place here, we can zero right back to banking.  It doesn’t take much of a leap to consider a connection to your Bank through a Prism like vehicle.  The power of a desktop application, combined with the advantages of a thin client browser.  This is the promise of web based applications, and the only outstanding question… will that be with Google or FaceBook sir?

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Written by Colin Henderson

October 28, 2007 at 01:47

Posted in Web/Tech

TD Canada Trust has an app in FaceBook

Its a low risk decent value application, and its just heartening to see TD in FaceBook.  Thanks William at NetBanker for the tip.  There are 71 users who have added this app so far.

Facebook | SPLIT IT by TD Canada Trust

Welcome to the SPLIT IT by TD Canada Trust application – a no-hassle, budget-sharing tool that enables you to share bills with your roommates. SPLIT IT makes it easy to determine who owes what, view your balances, and keep on top of your payment dates.

It’s easy to use: Invite your roommates to participate and start sharing bills and expenses such as rent, water, gas and food!

The TD Canada Trust SPLIT IT application appears on your facebook profile, but ONLY YOU can see the bills. No one visiting your profile will be able to see any financial details of your SPLIT IT account.

Incidentally I searched FB apps for other Banks, but their search is not reliable.  I searched for TD and even this app did not show up.  So if there are other Banks or Credit Unions in FB, I would greatly appreciate if you could leave a comment here, so we can catalogue them.

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Written by Colin Henderson

August 16, 2007 at 21:40

Jeremiah Owyang | “All your widgets are belong to Facebook”

With all the FaceBook hype, I enjoy contrarian views.  For my earlier posts on this theme, read here – (the Bebo post), here – (the web app post), and here (the AOL post).

Web Strategy by Jeremiah » All your widgets are belong to Facebook

1) For example, my non-Facebook friends can’t see what
I’m doing, and I’m a public guy. If I link to Facebook, you have to
register and sign up, brilliant web acquisition for Facebook.

2) But after I’ve setup my profile, and I would like it to be an
open platform, I should have the ability to make my profile public and
let folks see the elements I want.

3) What about my network? data? Profile? I want to export those.
(Same thing to LinkedIn). The rolodex of today has an important field
“friends”. I want to be able to export my network other systems and
applications. What say you Marc Canter? Here’s a softball.

4) Last gripe? As far as I know Facebook doesn’t even have RSS

Written by Colin Henderson

July 22, 2007 at 22:22

Posted in Social networks

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