Greed is still good. Wall Street has just witnessed its largest ever stock market launch as Chinese internet giant Alibaba raised some $25 billion and watched its share price rise by 35% on its first day’s trading. It says a lot about how little we have changed after the 2008 crash. We are still willing to be seduced by the perennial golden goose; still fearful of missing out; and still addicted to power, wealth and growth at any cost.
So if the shares saw such a spike, why did the bankers get the pricing so wrong? Effectively, the company lost over $8 billion at the launch because it did not pitch at the right price to investors from the outset. It is a similar story to the sale of Royal Mail shares in the UK, though without the political fallout. The sad reality is that finance theory knows little about the fundamental value of a company as it all depends on future expectations which are uncertain and unpredictable. Even the best financial institutions could not price the shares “correctly”. The Financial Times believes the share issue was wildly over-priced and says that only with hindsight will we know whether the market is pricing US equities correctly.
The FT has also expressed concern that a lot of investment is happening through hedge funds and funded with borrowed money. The bets are being placed with money from the banks which means the repercussions can be systemic if prices fall.
Prior to the sale of the shares, millions were spent on a big public relations exercise to boost the profile of Alibaba. Its founder Jack Ma had to go around the world to persuade potential investors about the future prospects of the company, and reassure them about the fact that the new shares do not give voting rights or direct ownership of the company. He argued that the legal structure is robust and reliable, but the legal structure is frankly complex, and the rights it gives shareholders not precisely clear. Room for doubt then you might say, and yet billions poured into the company.
The finance textbooks have little to say about the value of public relations and marketing when share prices are set. In fact, theory predicts that in an efficient and perfect world, it is a waste of money as investors and markets are smart enough to figure out the truth for themselves. Alibaba and its bankers clearly thought that theory was worth ignoring: millions were spent, the launch was seen as a huge success, and credit given to Jack Ma. It was a clever stage show.
The fact that all this is happening right in front of our eyes – and allowed to happen – shows how out of control modern finance has become. Prices are based on expectations, and expectations of expectations. It also shows how willing many people are to cast their values aside for a share of the rollercoaster fortune, no matter how it is made, by whom or with what wider and longer-term repercussions for society. Just as Aladdin unleashed a genie from his lamp, it seems with Alibaba we have unleashed a genie out of global control, but with huge global power and influence. The market has said Open Sesame, without fully caring for the consequences. All most of us can do is to sit and watch, and be ready to bail out this gambling machine if it all turns sour. We are all participants in the feeding frenzy, whether or not we eat. Society is once again taking involuntary risks through financial markets, and we have already experienced the human consequences of this madness many times.
All gain no pain
We should also question the fundamental ethics and values of those investors and institutions so keen to make a quick return for no effort at all. When people put effort into their jobs or business, and it grows, they can experience the joy of achieving something, learning and enhancing their skills in the process, and sharing the rewards with their colleagues or stakeholders.
I fail to see human sacrifice in earning a quick buck on Alibaba shares, nor any interest in the fundamental ethics of the company or its practices. It is classed as a combination of Amazon and eBay in the world’s fastest-growing economy. It is a middle-man – not a manufacturer or farmer, but a supplier with huge selling power and reach. Jack Ma thanked the investors for their “trust” in Alibaba after the successful launch. The Guardian reports that Ma’s letter to staff the day after the IPO signalled the firm would “adhere to the principle of ‘customers first, employees second, shareholders third’.”
The report also notes criticism that Alibaba sites are a magnet for sellers of fake goods, even though the company says it spend millions rooting them out. Ethics seem very far from the way modern powerful businesses act and behave. Contradiction is rampant.
When investors are on a rollercoaster, the only thing they pray for is that they can profit from the ride, and get off just in time. No trust is involved here. Initially there is a fear of missing out, and later there is a fear of staying involved according to the Financial Times. The common by-word is fear. We are afraid to not make money, and afraid of losing it once we have made it. That fear imprints on our psyche, and lasts longer than the profit we have made from the bubble.
The investors who piled into Alibaba are not so different from the rest of us. Financial fear ruins the lives of so many ordinary people and I wonder how much modern finance contributes to depression and mental illness? The Tax Justice Network have shown that is indeed a curse on society. Instead of being its servant, it has become our master. They are not far from the truth. Perhaps if financial markets would scale back the bets based on smoke and mirrors, fear and greed, then we might be able to learn to trust one another for real.