Tag Archives: European Union

EU Regulators Focus On Desk Chairs While The Titanic Sinks.

I love it. Europe is quickly falling into the financial crapper of a lifetime, and instead of focusing on ways to revive their economies and develop a central governing body, they are focused on things like this:

 

EU regulators, investigating Google for alleged anti-competitive behavior, want the internet search giant to offer concessions that cover all platforms, including computers, tablets and mobile devices, two people familiar with the issue said on Friday. What concessions?

If Google is not able to provide satisfactory concessions, it will face charges and potentially severe fines, the EU’s competition commissioner, Joaquin Almunia, has said.

Almunia wants remedies for all computing devices that have access to the Internet and provide a search capability, one of the people said. Remedies? For what? Where’s the damages?

Earlier this month, the world’s most popular search engine proposed concessions in a bid to settle an 18-month long investigation fueled by complaints from rivals including Microsoft. Neither Google nor the EU have said what those concessions were. Ahh, yes.

The European Commission is now examining the offer. The EU watchdog has said Google may unfairly favor other Google services over rivals and may have copied material from other websites, such as travel and restaurant reviews without permission. Then sue them.

It is also concerned that Google’s advertising deals may exclude third parties from concluding similar deals with rivals while contractual restrictions on software developers may prevent advertisers from transferring their online campaigns to rival search engines. And, what? Google should be punished for making a good deal with advertisers? These people ARE crazy.

This smells to me like a complete red herring and a way for Europe to extort some sheckles from the Googs to help with their sovereign defaults. Don’t give in, Googs. This one will go away.

 

 

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Investors: Are You Kidding Me?

I don’t have a clue as to why the Dow is still trading above 12,000. The global economy in 2013 looks awful.

The Eurozone crisis is worsening, heavy-handed, almost emotionally-driven fiscal austerity measures are deepening recessions in most member countries, continuing high oil prices and a severe credit crunch are completely undermining any prospects for recovery.

And, I am an OPTIMIST!

The Eurozone banking system is turning into isolated stovepipes as cross-border and interbank credit lines are cut off and capital flight continues. Greece’s upcoming disorderly exit from the Eurozone will create a huge, apocalyptic bank run. I have only used “apocalyptic” once once in 370 posts.

Spanish and Italian interest rate spreads are back to their ridiculous and unsustainable levels, and the Eurozone appears to need not just an international banking bailout (as happened recently in Spain) but a sovereign bailout as well. Smart money says the Eurozone goes full bore into a disorderly exit from itself in 2013.

Back at home, the US economic performance is weakening, with first-quarter growth a ridiculous 1.9%. Job creation stalled in April and May, and it is probable that the rate could completely stall out by year end. We have talked about why jobs aren’t coming back before. There is the real risk of a double-dip recession next year, as tax increases and a continuing housing market disaster will reduce growth in disposable income, consumption and confidence. Doesn’t matter who gets elected in November.

Political gridlock will continue. There will be fights over the debt ceiling, student loans, the JOBS act, fiscal policy and taxes. There will be new rating downgrades and this time, a real risk of a government shutdown, which will further depress consumer and business confidence, reduce spending and accelerate a flight to safety that should knock the Dow down to below 8,000.

China, is actually a mess. Their growth model is totally unsustainable, their leadership is way too slow in accelerating structural reforms, and its investments are heading underwater. Leadership must reduce national saving and increase consumption, but politics and a difficult leadership transition will result in policy that does too little, and does it way too late. And, how many women do you see here?

We are all tied together now on this little planet. The Global economic slowdown will create a massive drag on growth in emerging markets, given their trade and financial links with the US, China and the European Union. At the same time, government intractability in emerging markets, and a collective surge towards greater state capitalism, will slow the pace of growth and will reduce their resiliency.

If all of that isn’t freaky enough, consider the long-simmering tensions in the Middle East between Israel and the US on one side, and Iran on the other, on the issue of nuclear proliferation. The current negotiations are likely to fail, and as we have pointed out on this blog a couple of months ago, tightened sanctions will not stop Iran from building nuclear weapons. The US and Israel will not accept negotiations, so even if the rest of the world were rosy, a military confrontation in 2013 would lead to a massive oil price spike and a global recession.

If you are a Global economic leader, you’re first response should be to shy away from risk, especially when no matter in which direction you turn, you see more and more.  So, most leaders are adopting a wait-and-see position which exasperates the slowdown and makes a Global recession largely self-fulfilling.

And, if you think that we have already seen this movie in 2009-2009, and think, so … how bad can it be? Think again. Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of, or have already run out of policy bullets. Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. And, “Twist” is a cruel joke. Cruel, because it creates a sense that Congress is actually doing something to fix the economy when the time for fixing has come and gone.

Economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited any possibilities for further fiscal stimulus.

Sovereign risk has now become bank risk. In the Eurozone, sovereigns are dumping a larger fraction of their public debt onto their banks’ balance sheet.

To try and prevent a disorderly outcome in the Eurozone is futile because of the first law of cat-herding. The current fiscal austerity needs to be implemented much more gradually, a growth contract should complement the EU’s new fiscal contract, and a fiscal union with debt mutualization (Eurobonds) should be implemented.  In addition, a full banking union, starting with Eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the Eurozone. But, of course none of that is possible. Look no further than Germany for the answer.

Germany, understandably, resists all of these key policy measures, as it is obsessed with the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. Why on earth, should Germany carry the weight for countries who have irresponsibly led themselves into fiscal and economic policy disaster?

The Eurozone bubble may be the largest to burst, but it is not the only one threatening the global economy in 2013. Stay tuned. Sell all your equities. Stock up on canned goods and booze, and batten down the hatches.


Czech’s Say, “No Thanks!”

In my earlier post this morning, I focused on the ridiculous European Commission proposal for regulators and a European banking union. Here’s what the Czechs think about that:

The Czechs, who have been highly Eurosceptic, have absolutely no plans to join the euro zone, and have a healthy banking sector, have long opposed moves to centralize banking oversight.

The Daily Hospodarske Noviny (the Czech version of the New York Times) quoted Prime Minister Petr Necas today, as saying that regulation should be kept on a national basis. “We are convinced that the very high quality supervision by the Czech National Bank should not be diluted into some pan-European supervision,” Necas said.

Czech central bank Vice Governor Vladimir Tomsik said he was against raising moral hazard in the banking sector and creating a mismatch between national responsibilities of regulators while their authority would be moved to a European level.

“And the third pillar, a pan-European deposit insurance fund: I believe that is also unacceptable, because it is not possible for other countries to pay for mistakes of individual banks or supervisors,” he said in a transcript of a television interview posted on the central bank’s website http://www.cnb.cz.

And, as we mentioned in that earlier post, the UK is violently against any such proposal. British finance minister George Osborne said today that London will want to ensure safeguards are in place to protect its financial sector if the euro zone moves towards establishing a banking union.

“There is no way that Britain is going to be part of any euro zone banking union,” Osborne said in a radio interview.

So, now we have two Eurozone participants, Germany and England, making it crystal clear that they oppose any such move, and are joined by a conservative, non-Eurozone member with a healthy banking sector, who will also be severely impacted by frivolous proposals like this one.

Who are these guys and why are they allowed to speak in public?

While it is difficult for America to step into this mess, the situation in Europe is crying out for an intervention. Bernanke, Geithner and Obama have a herculean task on their hands just wrestling the U.S. economy back into grow mode with no assistance from U.S. banks, but they really need to get involved and act before the whole union catches fire.

The potential impact of a European banking collapse goes way beyond the $39 billion exposure our U.S. banks maintain. The end-result will be chaos that will drive the entire global banking community to freeze credit of all kinds, including government and corporate bonds, the last bastion of conservative investment safety.

Either the Fed and the Administration agree that Europe can be solved by a huge stimulus influx that will be sourced in a coordinated and equal effort by the U.S., Germany, China, Korea, Japan, Middle East, The UK and the rest of Europe, both in and out of the union, or agree to let it fail and accept the global consequences. This is a lot larger problem than Lehman Brothers. Maybe we need to bring Paulsen back. He was so good at bad news.

In the very short (weeks) meantime, the Fed needs to bully/scare lawmakers into actually doing something helpful. In other words, Bernanke needs to continue pressuring Congress to act now instead of bringing the economy to a so-called fiscal cliff at the end of the year where several tax cuts could expire and the debt ceiling may need to be raised again.

If I were Bernanke, I would be yelling at Congress to do something right with fiscal policy. There can’t be any more uncertainty about the fiscal cliff at the end of the year. Democrats and Republicans have to stop playing politics and actually turn into statesmen.

The European Union itself is clearly doomed. I am starting to worry about the U.S. union as well.


European Commission Rearranges Deck Chairs As Europe Burns.

The European Commission proposed what has been characterized as far-reaching powers for regulators to deal with failing banks on Wednesday.

Is this a chilling picture? This tepid proposal, which recommends closer coordination between countries and increased powers to force losses onto bondholders, won’t take effect before 2014, which will be way too late for Greece and Spain, which appears on the brink of being forced to seek a Greek-style bailout, as it is obviously unable to refinance its indebted lenders.

Even if Europe were not on fire at the moment, there are a ton of hurdles to the banking union championed by ECB President Mario Draghi – which is basically a three-pillar plan to establish a central monitoring of banks (gee, I thought that’s what the ECB already did), a fund to wind-down big lenders (we call that a bail-out here in the U.S.) and a pan-European deposit guarantee (good luck getting anything done “pan-European” style.)

Smartly, and true to form, Germany has balked at signing up to a single European scheme that could see it shoulder the costs of a bank collapse in another country (and, why should they?), and Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its Wall Street like economy.

At least there are a couple of people who have noticed that Europe is burning:

Nicolas Veron of Brussels think tank Bruegel, says “Everybody’s energy right now should be focused on the current crisis. I’m not sure we can afford the luxury of thinking about a permanent framework when the houses are burning.”

Daniel Gros of the Centre for European Policy Studies think tank said while it was in everyone’s interest to prevent a repeat of the chaos that followed the collapse of U.S. investment bank Lehman Brothers, action was needed now.

“We need immediate decisions”, he said. “We have a crisis on our hands.”

The Commission’s stupid 156-page (draft) legislation, recommends giving supervisors powers to “bail in” or force losses onto bondholders of a failing bank so that taxpayers are kept off the hook, and forge closer links between national back-up funds to wind up cross-border lenders. They can’t even move off of draft.

Are they kidding?

“There was little appetite to create pan-European funds,” he said. “There would be mistrust among states in pursuing such cooperation.”

Translation: Nothing will happen.

Berlin, recognizing the panic in the details and knowing it is firmly in the driver’s seat, is in no hurry. Germany knows that Europe will not make any final decisions on strengthening economic policy coordination between member states until at the earliest, spring of 2013.

The Centre for European Policy Studies’ Gros said only an acceleration of the crisis would prompt German Chancellor Angela Merkel into faster action.

“If it is a slow grind, where the German economy is not visibly affected, it will be hard for her to do that. It has to be so urgent that there is an emergency summit of leaders and that she returns home and says: ‘there was no choice’.”

If you knew that it would come to that, and you were Angela Merkel, what would you do?


George Soros Calls It Like It Is.

Billionaire George Soros delivered a speech today that absolutely nails the European financial crisis. If you want to read the whole speech, in all its brilliance, you should go to his website, http://georgesoros.com/interviews-speeches/.

It accurately and simply explains how the European Union got itself into the current mess, and what it needs to do to get out of it.  Here are excerpts:

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it.  When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement.  At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

And then came the moment that German, formerly at the forefront of a federated Europe, stopped the progress dead in its tracks…

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers,

Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly.

It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

This is a really huge point to grasp, because a nagging question has been: Why did the market think of Spain/Greece/Italy/Etc. as being risk-free sovereigns at one point, and then decide that they were not risk free and subject to credit risk.

Soros answer: Because they were essentially risk-free so long as the arc was always towards more integration. That ended when Merkel made that declaration.

Despite the fact that the Euro crisis has been happening for at least 3 years now, there are still many who can’t articulate the roots of it as well as Soros does in these two paragraphs:

The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose, the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced, the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms.

Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance, Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

His key warning:

In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities, I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

And, my money is on Germany showing a different sort of leadership and withdrawing from the European Union and from the currency. From their point of view, it is really their only way out of this mess.


The End of the Euro Nears.

As we watch the growing deterioration of the Greek and Spanish banking systems, I thought it might be interesting to take a closer look at the major U.S. banks’ overseas positions and exposures.

Citigroup has the largest net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet.  JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley is third with €5 billion ($6.2 billion), and Goldman Sachs holding the smallest position of the four big banks with €4 billion ($5 billion) in non-U.S. sovereign debt. Remember how Wall Street reacted when JPMorgan lost $2 billon in derivative exposure a couple of weeks ago? Now, imagine a $39 billion loss. As Senator Everett Dirksen famously declared, “A billion here, a billion there, pretty soon it adds up to real money.”

This is an important data point because the U.S. banks are completely exposed to the growing European banking disaster. Europe’s entire banking sector has the potential to collapse completely if the contagion catches and runs completely amok. With the current run on Greek and Spanish banks, the possibility is slowly becoming a probability. Without an EU-wide deposit guarantee, depositors will withdraw all of their funds and move them to their mattresses.

In addition, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, putting them in the unenviable position of causing systemic ignition to just such a contagion.  As one example, French banks (Credit Agricole and Societe Generale) hold a substantial portion of their credit portfolio in Italian sovereign debt. Which we know is worthless.

Europe as a whole is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in at least a partial breakup of the EU.  The actual likelihood is that Greece, then Spain, followed by Portugal, Italy and Ireland will drop out of the EU.

If that happens, Germany’s most rational choice would be to withdraw as well. After all, why should they continue their exposure to more poorly managed countries who will only default on what remains of their sovereign debt?  France, Sweden, Belgium, the Netherlands and the U.K. would be quick to follow in Germany’s footsteps, leaving behind, a handful of countries like Cyprus, Estonia, and Latvia to sort out the remaining arguments for remaining in the Union and supporting a single currency.

It doesn’t take much of a mental stretch to imagine what would happen next.


A Crisis of Massive Proportion.

Well, we had the obligatory G-8 meeting at Camp David last weekend,

and appropriate lip service was paid to keeping Greece in the euro zone, but the economists who are watching the continuing financial crisis in Europe are rapidly coming to two conclusions: 1) Greece is likely to abandon the common euro currency now used by 17 European countries. And 2) there will be a damaging domino effect throughout most of Europe.

One of the effects of this abandonment results from the impending Greek revival of its traditional currency, the Drachma. Salaries and prices within Greece would be converted from euros to drachmas, and the drachma would be allowed to depreciate to make the Greek economy more competitive.

The problem comes with debts that are denominated in euros, especially if the lenders are outside of Greece. These lenders would naturally resist being repaid with less valuable drachmas. However, if Greek borrowers have to repay the loans with euros, the debt would become more expensive for them to pay off after the drachma is devalued.

The most likely result therefore, is that debts to non-Greek creditors would become useless after Greece switches to the drachma.

(Shocked face here – I believe we predicted this back in January).

After all of the inevitable lawsuits, defaults, forced reductions in repayment, the lenders end up holding an empty bag and losing big money. Just as in the U.S. banking crisis of 2007-2008, once some banks lose enough money to become troubled, the contagion spreads to other banks, because they are all tethered to one another as co-parties.

The Central Bank and the IMF would step in and try to stabilize the situation, and Germany would take its lumps (and perhaps a few islands) and after a couple of years on the Drachma, Greece stabilizes itself and life goes on. Sounds ugly, but generally benign, right? Unless you happen to be a Greek, that is. But what else might happen?

Well, there is always our friend, the derivative, and it could easily set off a global chain reaction. You know derivatives, right? They are the complex, “synthetic” financial securities, which Warren Buffett famously referred to as “financial weapons of mass destruction.” And which recently caused Jamie Dimon some embarrassment and a $2B loss.

In the case of government bonds, these instruments are known as credit derivatives. They include all sorts of loans secured by bonds as well as incredibly complicated vehicles that amount to insurance policies if the bonds default, like CDS. No one really knows how much of this stuff is sloshing around the international financial system, but the total value for all types of bonds was estimated at more than $50 trillion in 2008 and has continued to grow rapidly since then.

Trouble is, if the bonds underlying these derivatives become questionable, all the derivatives become uncertain too, even if they add up to far more than the value of the bonds themselves. Moreover, some of the synthetic investments based on Greek bonds could be governed by Greek law, some by British law (if anything originated in London) and some by U.S. law (if Wall Street was involved).

What if one legal system accepts the conversion of euro loans into drachmas and another doesn’t? Everything could be thrown into the courts for months. Even worse, if synthetic investments secured by Greek bonds become untrustworthy, why would anyone trust similarly complex investments involving Spanish bonds or Italian bonds?

The result of a meltdown in the world of derivative investments could cause far more chaos than simple bond defaults, because at the very least, it would be almost impossible to figure out who owed how much to whom.

So, let’s say Greece recovers quickly, and Italy, Spain, Ireland and Portugal want out of the euro zone too. There is the very real possibility that Greece abandons the euro and bounces back surprisingly fast. In fact, that is exactly what we urged them to do back in January.

But, our recommendation while good for Greece, would cause another sort of disaster, potentially much, much larger than the one facing the Greeks. Both Argentina and Iceland suffered currency collapses, but after a horrible year or two, they each rebounded and were better off than if they had fought to save a failing currency. Analysts point out that both countries were big exporters of grain, meat or fish and those sales boomed after currencies were devalued.

Greece, in its own way, could profit from a similar recovery — a rebound in tourism. A 30% drop in the exchange rate might make a vacation in Greece the best deal in years. Even for Germans.

Good for Greece, but not so good for Europe and really bad for the U.S.  How could the Italian government convince its people of the need for higher taxes or the Spanish government explain soaring unemployment if Greece were obviously better off outside the euro zone? They couldn’t and wouldn’t even try. In order to remain in office, any politician worth his salt would say, “Hey. Let’s follow Greece’s lead.” Then the entire European Union would likely unravel, with Germany leading the way and with Global financial consequences many times greater than those resulting from Greece alone.

U.S banks are deeply invested in the European outcome and are in the impossible position of needing to hold their positions otherwise risk a banking panic of global proportions. The best they can do now is hope and pray, neither of which has ever been a really good strategy. However, the best you can do now is to sell all your bank stocks and watch the show safely from the sidelines.

And, what a show it is bound to be.


Watch Out Great Britain. Here Comes Europe!

All of Europe is now preparing in earnest for a Greek and Spanish exodus, but none more warily than the British.

Citizens of EU countries do not need work permits to settle and work in the UK. And the British, who run one of the most generous socialized health and welfare states in Europe, are getting really nervous. It is not only possible, but really easy for EU citizens to claim free health treatment on arrival and to register for UK social security payments.

British Home Secretary, Teresa May, told the Daily Telegraph today that the UK authorities were exploring emergency immigration controls in case of a Greek exit; those same controls might also be needed if further economic turbulence develops in countries like Spain, causing an exodus of unemployed workers.

a privilege that has been a long time coming all over Europe. Prior to the 1980s every country ran their own border controls. Cars often queued for hours to pass from one country to another, while officials checked passports. Under EU law however, inhabitants of the Union are allowed to travel freely between each country. Post-transition, the UK has been exceptional in maintaining some degree of border integrity, so what May has in mind goes much further than passport checks.

The Home Secretary says that the Government is already “looking at the trends” to determine whether immigration from beleaguered European countries is increasing. While there is no evidence of increased migration at present, she adds that it is “difficult to say how it is going to develop in the coming weeks.”

Meanwhile, in an interview with The Guardian newspaper, IMF head, Christine Lagarde, insisted it is payback time for the Greeks.

She was asked in an interview about whether Greek tax evasion and corruption were responsible for the country’s current difficulties, and she made no bones about assigning blame and indicating her disapproval of the Greek government’s handling of the crisis. When asked if it was payback time, she said, “Absolutely.”

The internal bickering around Greece’s future appears either to be preparing the ground for exit or for one final attempt to enforce the conditions of the EU-IMF bailout. But what is clear is that Greece is in the final hours of their agonizing descent into fiscal chaos, and the outcome won’t just affect the Greeks, but the rest of the European population as well.

To say nothing of the US banking system. Stay tuned for Wall Street’s wild ride. 


The Wrong Day to Quit Sniffing Glue or to Make Your IPO Debut.

And now, with permission from my buddy Dara Albright, Founder of NowStreet Journal, we have her insight to the FB IPO:

Some call it a cultural phenomenon. Others label it a colossal waste of time. No matter the sentiment, all attention was on Facebook’s IPO entrance on Friday. Well, except for NASDAQ, who was too focused on repairing its malfunctioning technology, oh, and the European Union, who was busy worrying about its looming financial collapse.

Instead of skyrocketing, as was widely predicted among analysts on the Street, Facebook closed up a mere $0.23 cents, not even gaining 1%. News circulated during the day that even Facebook’s bankers had to jump in and support the stock from breaking its offering price. A far cry from LinkedIn’s IPO entrance, almost exactly one year ago, which nearly tripled its offering price during its first trading day.

The most anticipated IPO of the decade and largest technology offering in history had a less than stellar IPO debut. Yikes. What does this say about America’s capital markets? What does this mean for its economic future?

If we’ve learned anything today, it’s that timing is everything and no one, not even Wall Street’s finest, can predict the ideal day to go public. Sometimes you just “pick the wrong day to quit amphetamines”. But, bankers can sometimes price an offering correctly. And this was one of those times. Had Facebook’s stock price shot through the roof, Friday’s headlines would have read something like, “Once Again Wall Street Bankers Underprice a Deal & Screw the Issuer”.

Facebook’s underwriters should be commended. But I do not want to give them too much praise for fear it will go to their heads and result in the creation of yet another destructive derivatives product. “There’s no reason to become alarmed, and we hope you’ll enjoy the rest of your flight. By the way, is there anyone on board who knows how to fly a plane?” Sorry, once you start quoting the movie, “Airplane”, it is almost impossible to stop.

Facebook’s lackluster IPO performance also affirmed what we all know but most don’t like to confront – the public markets are significantly broken. It is challenging for companies to thrive in a trader-centric marketplace where fundamentals are rendered practically meaningless and company stock prices are at the mercy of extraneous events. Last week, Europe sneezed and Facebook caught the flu.

Unfortunately for Facebook, not too many traders came to the realization that Europe’s bleak financial future and rising unemployment actually benefit Facebook’s business. Look how many more jobless people will now have time for Facebooking. Does anyone see the irony here?

Facebook, say goodbye to the autonomy of the private markets. Now, instead of being valued on your own merits, you’ll be assessed based on the accomplishments and failures of those who have nothing to do with you, subject to the second-by-second mood swings of those judging you. Welcome to public market hell where you will now be viewed as a ticker symbol as opposed to the global innovator you are.

Don’t worry, “FB”, many considered the IPO of “GOOG” to have been a great disappointment too. Contrary to “GOOG”, at least you were not forced to slash the price and size of your offering. And remember Webvan’s hot IPO? Its stock price more than doubled during its first trading day. Perspective.

So just where was Facebook’s aftermarket love on Friday? This leads me to the final and most important lesson of the day. Even the most grandiose of companies have trouble thriving in a marketplace that lacks the aftermarket support derived from long-term investors who are more interested in funding companies rather than trading tickers. These long-term investors are a company’s clients, its customers, its users, its partners and its supporters. In Facebook’s case, they are the 900 million across the globe sharing updates, photos and videos every day. If each user bought just one share of FB, it would equate to $34.2 billion in pent up demand.

I don’t doubt that Facebook will ultimately achieve success in the public markets. It is one of maybe a handful of companies on the planet, including AAPL and GOOG, who can provide its own aftermarket support by harnessing the crowd. According to Gene Massey, CEO of MediaShares and leading expert in Direct Registration methods, “Once Facebook has been public for 12 months, it can offer a direct stock purchase option to its massive user base. By doing so, it will not only gain stock support, but Facebook will also add valuable shareholder demographics to its existing database enabling it to become the world’s most powerful marketing and fulfillment company in history.”

Unfortunately, the vast majority of companies entering the treacherous public markets do not have a support group of 900 million. Unless something is done to fix the aftermarket deficit, more and more publicly traded companies will find themselves dying a slow painful death. This will only result in additional long-term investors fleeing the public markets in search of greater stock appreciation.

The fact is the mass exodus has already begun. The fastest growing companies no longer reside on NASDAQ. They are found in the rapidly expanding marketplace for private company stock (PCM).

Facebook has inspired a new generation of social businesses poised to capitalize off its extraordinary media platform. Many of these micro and small cap companies are already enjoying spectacular revenue growth. Historically, most of these companies would have been public at this point in their life cycle, creating wealth for public market investors. However, it makes no fiscal sense for these companies to be public today.

These private companies are all thriving, in part, because their investors consist of long-term shareholders who believe in their products, their businesses and their visions. Don’t all companies deserve the right to attract investors whose interests are more aligned with their own? Shouldn’t all investors have the opportunity to invest prior to a company’s greatest growth spurt? Shouldn’t all investors have the freedom to invest their own money as they see fit?

224 days, 16 hours, 38 minutes, 16 seconds until the democratization of the US capital markets.


Greece, Followed Closely By Spain.

It appears finally that Greece is about to abandon the euro and drop the charade.

The divide between the supporters of the 130 euro ($168 Billion) EU/IMF bailout and the opponents has resulted in an election that has failed to produce a central government, and a new election is planned. This of course means that the anti-austerity measure supporters won BIG.

Greece is about to run out of money (in June) and there will be no government in place to negotiate the next tranche. Investors are betting that Greece will default and withdraw from the European Union in the next few months. Spanish and Italian bond yields rose as investors fretted the political deadlock meant Greece was on track to become the first country to abandon the euro. Followed closely by Spain and Italy. Germany better start pulling its horns back in.

“We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” European Commission spokeswoman Pia Ahrenkilde Hansen told a regular news briefing.

The prospect of national bankruptcy and a return to the drachma appeared to be slowly sinking in among Greeks, who must now choose between the pain of spending cuts demanded in return for aid and the prospect of even more hardship without the euro.

“We have to stay in the euro. I’ve lived the poverty of the drachma and don’t want to go back. Never! God help us,” said Maria Kampitsi, 70-year old pensioner, who was forced to shut her pharmacy two years ago due to the economic crisis.

“They must cooperate or we’ll be destroyed. It will be chaos. For once, they must care about us and not their own position.”

Polls suggest SYRIZA would come first if elections were held again, netting it a bonus of 50 extra seats in the 300-seat parliament and raising the odds for an anti-bailout coalition taking control of government.

German Finance Minister Wolfgang Schaeuble said Greece was in a “dreadfully difficult situation” but would pay a high price if it left the euro.

It looks grim.

While this is happening in Greece, Spanish students are protesting on Barcelona‘s elegant boulevards, public-sector wages are being cut for the second time in three years and resentment is growing against the central government and beneficiaries of bank bailouts.

Such is the daily fallout from the euro zone‘s debt crisis. Like the rest of Spain, Barcelona is looking at several years of hard grind as the country adjusts to living within its means after the collapse of a debt-financed housing bubble that has brought much of the banking sector to its knees.

Spain is more representative of the generally insidious, demoralizing nature of the crisis: austerity is sapping trust in politicians across the euro zone and fraying the social fabric as the bills for years of economic mismanagement are shared out.

“The problem is social. What are we going to do when we have 25 percent unemployment? It’s dramatic,” said Joan Ramon Rovira, head of economic studies at the Barcelona chamber of commerce.

Even though every fourth Spaniard is unemployed, job protection is being eroded. In Barcelona, capital of the northeastern region of Catalonia, hospital wards are being closed, class sizes are growing and university fees are rising.

The result is a hardening of attitudes as various groups campaign to preserve their entitlements. The crisis has also ratcheted up political tensions with Madrid as supporters of Catalan independence increasingly begrudge helping to bankroll the central government, which they feel treats them with disdain.

“Spain is a backpack that is too heavy for us to keep carrying. It’s costing us our development,” said the spokesman for Catalan President Artur Mas, Joan Maria Pique.

Spanish banks have more than 180 billion euros of sour property assets on their books, and analysts fear there is worse to come as recession triggers more corporate and mortgage defaults. Spanish banks have ignored mortgage defaults and slumping housing prices on their balance sheets, so a reading of their books is highly misleading.

House prices have fallen about 25 percent since 2007 and a Reuters poll published on Friday pointed to a further decline of more than 15 percent in 2012-2013.

Roubini Global Economics sees losses ranging from 130 billion euros to 300 billion euros and attaches a 60 percent probability to the need for a sovereign bailout followed, in 2015, by a restructuring of Spain’s debt.

Conversations in Barcelona suggest that people do understand the need for belt-tightening. Importantly, strong family ties constitute a safety net of sorts for the unemployed. But there is a sense that the sacrifices are not being fairly shared.

Felipe Aranguren, 59, who works when he can as a sociologist, rails against Spain’s “rotten” banks and wants higher taxes on the rich to pay for a “New Deal” public-works program.

Psychology student Celia Nisare Bleda, 19, fears that students from poorer families will bear the brunt of the education cuts. With every second young Spaniard out of work, she suspects that not even a degree will be enough to secure a job in Spain that pays decently.

Lots of students were going abroad in search of a better future. So would she if necessary. “With the salaries we’re likely to get, there’s no possibility of having a good life. We’ll be living all our lives like students.” Nisare Bleda said.