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Facebook, Goldman: That’s What Friends Are For

By Barry Elias   |   Friday, 21 Jan 2011 08:31 AM

If your trusted financial adviser recently invested $500 million in a company, and he suggested you invest heavily as well, what would you do?

In response, one such client invested $2 million.

This past week, that investment was no longer available to this client.

The investment of $500 million in Facebook was made by Goldman Sachs in conjunction with another firm. The client is now disgruntled.

Facebook is currently valued near $50 billion, based on a private exchange for trading its shares. This market provides Facebook rights of first refusal for sale of its “private” stock. It can purchase the shares itself or locate a buyer to make the purchase before another party can make the purchase.

One caveat: the number of shareholders may not exceed 500. Otherwise, regulatory mechanisms are applied, such as those administered to public companies by the Securities and Exchange Commission.

Goldman Sachs raised approximately $1.5 billion in private equity, from many participants, to invest in Facebook. They bundled these funds into a special purpose vehicle (SPV), which would reduce the number of shareholders to one, although the SPV is comprised of many shareholders.

As an aside, the use of SPVs has rightly gained notoriety in its application by Enron in the 1990s and Lehman (repo 105) to overstate net worth of the company.

This past week, Goldman elected to disband this SPV given the recent climate, and notified the investors, which it seriously courted, that it could no longer offer this investment to American citizens.

Some at Goldman may contend they didn’t understand the ramifications of this financial engineering. At best, this position demonstrates a serious deficiency in knowledge, expertise and judgment.

A more likely scenario is that they were quite cognizant of the underlying dynamics and implications of this financial engineering, but, as in the past, elected to proceed, because it would be highly profitable and they wouldn’t be liable.

The “climate” that prompted their decision to rescind the investment is clear. We have experienced a severe systemic failure: economically, politically and socially.

Technology has enabled curious minds to ascertain and interconnect information to define the systemic deficiencies, identify the causes, and more importantly, implement solutions.

These societal failures will continue to occur in equal or greater magnitude if we don’t address how we treat others.

“Do unto others, as you would have others do onto you” seems to be a forgotten tenet. Actions guided by this simple but prescient notion can alter the mindset and decision-making process, creating a win-win situation for the individual and society.

Mohandas Karamchand Gandhi (1869-1948), pre-eminent political and ideological leader, said beautifully, “Be the change you want to see in the world.”

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