Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure

Reggie Middleton's picture

Yesterday, I attempted to pull the wool from some of the more
complacent eyes of news media consumers by outlining the potential goals
for Goldman’s half billion “investment” in Facebook while at the same
time pondering the market for a different type of media concern. A media
concern that is heavy on the analysis and investigation, yet light on
the political correctness and conflicts of interest (see Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!).
I definitely don’t want to be condescending, but there is obviously (at
least to me) a need for such an entity amongst the mainstream rags for
as I read through the comment sections of the articles written on the
topic, I see such naivete as, “Wow!!! If Goldman is putting their money in this, it must be serious!
I say do myself, “It’s a damn shame if that is actually a real person’s
viewpoint and not a Goldman equity underwriting employee”.

You see, this is not about Goldman’s attempt to create capital gains
through investment, its about their attempt to create income through
commissions, fees and spreads.
I would like you, dear reader, to let me know why or why not such a
media concern as the one I intimated above should not make as much or
more money than Goldman, et. al. and the financial engineering bunch,
for the media concern actually imparts useful knowledge that actually
adds to society, know? Am I being to idealistic in my search for the
utopian world or is there truly a market for real knowledge and insider
info. I’m all ears. Now, back to the topic at hand…

I am also relieved to see comments from more thoughtful readers such as (this is from Dennis Howlett’s article over at ZDNet):

Serious question here: neither
article indicates what exactly gives Facebook it’s value. In my post
to the other article, I assumed it is advertising, but I can’t even
justify $50M on that business model. What exactly is being valued at
$50B? Someone please explain this to me. Or is it indeed a pump and

The answer to this reader’s question is that the monies being paid
are justified in part by Facebook’s popularity and control over X00
million eyeballs and stickiness, and in part by bubblicious marketing
techniques that are dressed in the guise of Goldman’s investment. I will
attempt to explain both parts of this in this article.

Mr. Howlett popped over to BoomBustBlog with a link to his article
making a case for the possibility of a Facebook IPO being the reason
behind the Goldman engineering. I will excerpt a few lines to get us all
up to the same page (before we move forward, if you haven’t read Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!, I strongly suggest that you do. It was alternatively titled “Goldman Creates a Facebook Hedge Fund for HNW Clients Historically Ripped Off By Such Vehicles, Spits In Face Of SEC…“).

In my earlier piece
I hinted that Goldman Sachs has a vested interest in building a case
for a $50 billion valuation for Facebook that has nothing to do with the
open market valuation. Larry Dignan thinks this is the pre-cursor to an IPO.
Mark Zuckerberg has been quoted as saying that an IPO is not on the
cards anytime soon. Peter Thiel, who originally staked $500,000 in
Facebook said in September that Facebook would not IPO before 2012.

…  According to Bloomberg, Goldman took the lion’s share of the 2009 $923 million IPO fees:

Banks increased fees for initial share sales by 62 percent to 5.63 percent
from the lowest level on record, even as the amount that U.S.
companies raised from IPOs decreased by almost half to $16.4 billion
this year, according to Bloomberg data. While the biggest surge

in stocks since the Great Depression revived the IPO market and helped
enrich bankers, almost 40 percent of offerings sold by underwriters in
the second half of 2009 have left buyers with losses
, the data show.

Crunch the numbers: at a $50
billion valuation, with Goldman in the box seat as lead banker to an
IPO and at the rates quoted in 2009, then it could pocket $2.8 billion
gross in fees. And that’s on top of whatever it creams off the $1.5
billion fund it is creating as part of the deal that sees it currently
investing $450 million. Assuming an IPO in the next 12 months then by
my reckoning, Goldman’s ‘investment’ nets a 6x return.

If Goldman is successful (and
remember that the Special Purpose Vehicle covering the $1.5 billion has
to get past the SEC first but honestly – do they care?) then what
happens to the Twitter’s of this world? Does its investors start
clamoring for an exit? You bet.

That can only spell one thing: bubble times are here again.

Ya Damn skippy, sailor. Howlett hit it right on the head. What type
of revenues, profits and growth justify a $50 billion valuation for a
very young, private company with sparse net cash flows? The type that
are marketed by those who are doing God’s work! now, let’s build on Mr.
Howlett’s and Dignan’s ideas the BoomBustBlog way. We shall begin with
the $1.5 billion dollar fund that Mr. Howlett alleges GS is creating
around the Facebook cash injection. Yesterday’s BoomBustBlog rticle, Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
clearly detailed why and how many of these private equity and client
funds routinely gut investors (we’re talking up to 92% in losses!) while
Goldman (and other GPs) still walk away with profits (see Even With Clawbacks, the House Always Wins in Private Equity Funds). I have posted the model that illustrates this bank wins, investor loses phenomenon as a live spreadsheet online for all paying BoomBustBlog subscribers
to use at will. It’s quite the comprehensive model and allows for the
user to run a myriad of their own assumptions using any inputs they
please. As subscribers will see, it is nearly impossible for Goldman to
lose money on their Facebook private fund, no matter how badly Facebook
shares perform. Please beware that is unlocked and fairly complex, so
please do not make any formulae changes to it for it corrupts the
experience for other users. Here is an excerpt for those who do
subscribe to our research and services, YET!

Even with the fund taking 45%+ losses and the LP (limited partners,
ex. Goldman’s clients) losing every last single dime, Goldman easily
pulls a 33% return. God forbid Facebook share actually do well,
Goldman’s numbers look… Well… Damn near illegal! Almost as if they can
pump up a price without any fundamental justification or public
disclosure of financials and still sell it retail to the public. Of
course, such a thing could and would never occur – not with the every
vigilant SEC to take our backs. Excuse me while a cough a up a lung from

You see, this is the dirty little secret of private equity funds.
They are not in the business of investing money for client’s maximum
risk adjusted return. They are in the business of collecting fees. Those
poor innocent (or not so, particularly when they are investing their
clients monies, hence are in the same business) souls that actually
believe as the commenter above quoted “Wow!!! If Goldman is putting their money in this, it must be serious!”simply
the lamb being led to the private equity/IPO slaughterhouse. You see,
there is no loss to GS – no matter how high they bid up the valuation
nor how hard it comes crashing down. This gives them the incentive to
shoot for the sky with the private equity deal, because when the IPO
breaks, its bonuses bigger than nearly any have ever seen. Facebook
makes and excellent marketing story as well. Boy Wunderkind CEO, a
product nearly everyone uses and loves, and a mysterious dearth  of
business model to give it a mystical effect. Don’t forget the
involvement of the “cream of the crop” of Wall Street banks, whose
bankers, traders and analysts are all so much smarter than us guys from
Brooklyn. Add this up, and you get “Wow!!! If Goldman is putting their money in this, it must be serious!”.

I will continue this in a few hours via my next article that
illustrates an actual Facebook offering, complete with valuations –
which should be a doozy, Wait until we get to add up all of those
Goldman fees – Facebook investors win or lose. Just to be clear, this is
not hate for Goldman, but elucidation and clarification regarding
exactly what business Goldman, et. al. are actually in and how they are
able to generate the profits that they do. Many think that Goldman is
the best and brightest on the Street. Those guys went to the same
schools, studied under the same teachers, graduated and employed using
the same strategies trading the same products as everybody else. Get
over the mysticism marketing bullshit and you just have a politically
connect, very well marketed investment bank that was just bailed out by
the government. The same as every major IB in this country. I have no
hate (nor love, for that matter) for Goldman but I am about setting the
record straight. If you really think Goldman is really that good at
anything outside of raking profits off the back of their clients, I
suggest you take a long, strong look at their track record versus mine - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

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Downtoolong's picture

They didn’t come up with the phrase, “Heads I win tails you lose” for nothing. The only thing that sets Goldman apart from the other Investment Banks is that they do a better job of hiding this fact from the poor schmuck suckers they must bring on board to ultimately back their scams. I pray every day that group of bottom tier investors doesn’t include me or any of the funds that I’m invested in. But, in today’s sorry excuse for fair transparent markets, who can really know for sure? 



“Come ride with me folks on my trip to paradise island. I’ll be towing you and a bunch of others like you on a barge behind my high speed cruiser loaded with a few of my close friends. If the weather stays nice, we’ll all be partying on the beach soon. You’ll be staying in my five star hotel that I’ve reserved just for you (payment in advance please). I’ll just assume you understand that if we run into bad weather I’ll have to cut you loose so I can still make the party in time, leaving you to drift on the high seas in the eye of the storm. If that happens, I’ll need to take your wallets, watches, and other valuable possessions first, unless you decide you don’t want any of my limited supply of water and K-rations to sustain you for a while. If this all sounds a bit too risky, maybe you would prefer to jump on board the venture I’m launching next week. It’s a new company that can control the weather, creating or eliminating storms at sea. Imagine the kind of money you could make with that.”

moneymutt's picture

Reggie, I don't no where I was first reading the article on the Goldman/FB thing but is was something mainstream like NYT, not ZH, and about half the comments were actually very good skeptical things on Goldman, exposing how they have ripped people in past, how they are skirting rules of such a opaque, closed market, good questions you would have never seen consistently 3 years ago..., another 1/3 were stupid chatter about how FB a waste of time (yeah like going to a bar, frat party, bowling alley etc, and TV and movies and video games are such helpful, productive activities), the rest were stupid comments liked you mentioned. But I was actually impressed on how skeptical people are becoming...unfortunately this does not seem to apply to the rich people handing GSacs their money.

Not that I'm going to cry crocodile tears for a rich person getting ripped off in a way they should surely see coming by now, but fraud is fraud, and markets should work right, even for rich people. Thing is if rich people invest in some doomed enterprise, at least the money goes to employees, researchers, engineers, builders for a while and some kernels of technology etc live thru the fire of collapse and go on to serve the world, but if financial parasites take the lion share of the money, win, lose or draw on the investment, then its just a complete waste for society except for the hookers then GSacs guy spend their money on.

Is almost like the writers and talking heads for the media folks are dumber than the regular people commenting on the stories.

Keep it up Reggie, even rich people deserve protection from sharks...

CPL's picture

Short the crap out of that POS right now!!  That's the best way to profit from the hog in silk dress.

topcallingtroll's picture

Silver is crashing! The top is in! Sell out now before you lose everything! (I will be happy to take it off your hands at 24, nice troll that i am)

Hephasteus's picture

I read this book.

The Machinations of the Cat Trying to Bury the Elephant Turd.

David99's picture

Citibank fraud case in India: FIR against CEO Vikram Pandit

done with them all's picture

 I'm not a financial pro so I usually see things from a different point of view. I wonder if GS is working towards capturing Facebook at the request of the TPTB so as to further lock up the control of information and privacy, personal info etc. no doubt money will be made and /or lost but I have a uneasy feeling about this.

The only web site I have ever signed up for is this one, and I don't really feel the need to join others to 'share' my life with the world. yeah I'm an old fart that doesn't sleep with his iphone,  hell I haven't used an alarm clock since I was 15 yrs old.


Thank you ZH and thanx to all the regulars. What I have learned here is priceless.

fl3tch3r's picture

I expect Facebook to be only temporarily successful.

Facebook is the equivalent of reality TV. Users spend hours keeping up to date with useless, meaningless and irrelevant information. It ranks with the worst of reality TV, or the incessant following of moronic so-called celebrities, that have played such a part in the ‘dumbing down’ of society.

I expect that GFC Pt.2 will awaken people from their slumber, and Facebook / Reality TV etc will die a long overdue death. And if my expectation is optimistic and doesn’t occur then we really are fucked.

moneymutt's picture

people will always want to exchange info and socialize on web, it may be that someone can take FB out like FB did to myspace, but people will congregate share, just like they did when they visited their neighbors, hung on street corners, loiter in malls, talked on the phone in the old days as teenagers, whatever...saying FB is waste of time is stupid critique...watching football is a waste of time, drinking beer at a bar is a waste of time, having a house party is waste of time...many people like to socialize, logging onto FB a few times a week for a few minutes or an hour is less time than people spent watching TV or talking to their mom on the phone 30 years ago...there is money in connecting people on internet, and yes its a waste of time...but so is every other leisure and social activity we do in life

MrBoompi's picture

I have no need to look at Facebook very often, however my wife is on there every night with her friends and other family members.  What stumps me is a web site/service like this could be valued at $50 Billion.  Like Reggie said, what kind of cash flow could justify this valuation?  I don't know anyone who's bought anything after watching a Facebook ad.  Oh well.


One thing I can see from a deal like this is it can only be temporary, or happen once, yet the principals involved can get rich overnight, and we'll still forget that all that money was taken from clueless investors who never had a chance.

ILikeBoats's picture

No one here is talking about the well-known fact that the CIA via its VC arm, made an investment in Facebook early on. 

Think about the surveillance and intelligence gathering capabilities Facebook has at its disposal: you think the media hype and GS investing is not part of a coordinated effort to get us all connected in such a way as to be easily tracked?

EvlTheCat's picture

Its funny you mention it in this way.  Most people you question would scream violation if the government wanted to implant a chip in there body or grope them in the airport.  However, they all line up and scramble over themselves to add a profile to Facebook and puke their lives up for the worlds viewing pleasure.

Seymour Butt's picture

Damn it, I'm already breaking my 1st New Year's resolution. Not to hate GS.

Note to self: If you go after a fly, sooner or later you will land on a pile of shit.  

runforthehills's picture

to be honest, this is a signature GS deal, as these guys are always much more aggressive than other banks to win business.. regardless of whether they are actually putting their own balance sheet in the equation or not, if this deal places them as the lead underwriter for one of the largest IPOs ever, it will have been a very good operation indeed..

bhj419's picture

not really understand,i will read it again 

Bartanist's picture

Goldman is great at generating profits for themselves and do it all through its network of insiders and an infinite authority to create fiat. Goldman and other international I-Banks do the footwork that the central banks cannot do because the central banks do not have the number of people required and the central banks need to maintain the illusion of aloofness for the gullible, corrupt and powerless in government.

Once one realizes that the central banks and I-Banks are in complete collusion and are in essence in complete control of the Western world (serving what master?) it is very easy to divine their methodology through their actions.

In addition to the insiders, there are a lot of gullible and ignorant "herd" people who are not inside "the club", but who desperately want to be on the inside and seemingly believe that if they allow Goldman to steal from them, bribe them occassionally and use their money to steal from others that they will somehow be thought of more favorably by the club.

However, just as the girl who is hoping to find someone who will love her by putting out for every guy who comes along, all that these hangers on get are deceptive words designed to entrap them further and hidden scorn and laughter at their stupidity. Sheople no doubt. Goldman is Bernie Madoff on a grand scale and with better infiltration into government and more purchased laws designed to cement its place and secure its future.

There may come a day in the future as people return to their roots and start understanding who we are that it will not only be a mark of shame to work at Goldman, but also to be associated with them. We can only hope that this terrible era of our history passes quickly and without great further damage to this world's people.

schaafgregg's picture

It seems like every other time I start to post a comment on a blog, I am told that I have to sign in to post and that if I click on the Facebook icon, I can most efficiently sign in. Increasingly when I go to view any informative video, I have to endure a short commercial to get to the clip.  Meanwhile, I don't see television commercials becaue what little television I watch is with a DVR which permits me to skip through the commercials, and I presume America doesn't have the attention span to actually read magazines as much as in times past. Therefore there are fewer outlets for advertising dollars and the available outlets are worth more. After the mass market advertising, Facebook has collected or is collecting an enormous amount of information about me to be mined for more directed advertising or sales.  There are undoubtedly other ways that the eyeballs on Facebook can be turned into commissions as a result of going to other sites from links on Facebook. Facebook is transferable to other countries/markets and already is a top ten destination for websurfing. Put those things alone together and the site is very valuable, although I have no idea how valuable.

Bartanist's picture

Just in case you might question motives and capabilities:

1. The internet is a way to collect the entire sum of human knowledge and to either save it or create a way for it to be easily destroyed.

2. Google is a way to track people's knowledge and habits individually. Google, through its street view has catalogued many things supposdly including open wireless networks.

3. All new cell phones and cars have GPS tracking.

4. Facebook is a way to characterize individual people and their associations.

5. Digital cable TV now tracks everything that is watched on every connected TV

6. Credit and debit cards track each individual's purchases

7. All of our financial transactions are tracked and evaluated

8. Every phone call is recorded, tracked and can be monitored

9. The average person shows up in something like 300 security cameras each day

10. We are told that monitoring satallites and overhead drones can see every inch of the planet and track all movement on it

We work in jobs designed by others and tend land that we do not own... and we pay interest and taxes for the priviledge of doing the work. The government that we supposedly elect works in secret, experiments on us and puts us in wars that nobody wants. But we are the lucky ones because 30,000 people of this world die EACH DAY of starvation.

One might argue, as the propaganda arms of the government argue, that all of this is to help protect us (collectively from ourselves) and to provide us with a more enriching life experience. One might also argue that all of these things are a natural evolution of a capitalistic society.

Then again, if you step back and look at the entire picture ... it looks a little different.

Boxed Merlot's picture

...we are the lucky ones because 30,000 people of this world die EACH DAY of starvation...


I heard from the pulpit on Sunday that if Facebook members were a country, only China and India would be larger populations.  Then with another click, a map of the earth lit up with the locations of those members concentrations.  Yep, quite the demographic.


Reggie makes a great case for the primary wealth drive / motivation for Goldman's participation but the ease with which the information posted by family and "friends" of members to each other can be filtered is the value in this asset.  Whereas Google is more an information dispersal tool, this "party-line" is an information generation tool.   imo.

As my education on ZH has shown, GS has proven its beyond governmental reach and is firmly entrenched in the ethereal realm of the cloud, as their world class algo programming skills / tools can attest to.  Adding a Russian component to the list of initial investors only drives the desire for dominance of this asset by pitting a bidding war between governments.

...Then again, if you step back and look at the entire picture ... it looks a little different...


That's my $.02.

Husk-Erzulie's picture

Fired up at all this morning Bart?  Ouch.  ;~p

OutLookingIn's picture


 Investing in what? What is behind the curtain? Advertisement revenue? Potential customer base list? Demographic dynamics statistics? What?

Sounds like an old fashioned, hard wired, multi party telephone circuit!

Alexander Graham Bell missed out! He could have sold shares in party lines!

What next? Carbon - check. How about "free" oxygen?

Mercury's picture

It's really hard for me to grasp the effectiveness of Internet advertising.  I'm sure I'm very much in the minority here but out of the gazillion hours I've spent on the Internet I've clicked on maybe three ads in my life.  I've probably "absorbed" much more ad content -brand awareness and all that- but woe to the business that has paid good money for my eyeballs. 

I guess the bottom line is if you start advertising on Facebook or some place and sales shoot up, that's all that matters but just look at all the dumb ads on ZH (Cramer for Pete's sake - how's that campaign going?).  It just doesn't seem like the most effective use of marketing dollars in many cases but I admit to considerable ignorance in this area.

Husk-Erzulie's picture

Facebook has the lowest click through rate of almost any high profile website out there, by a wide margin.  That said, they can claim truthfully that one in every twenty eyeballs on earth will pass across their space within say one month.  That is huge.  If one is relying on click through then to sell whatever it is...not so good.  But, for building brand awareness (think of that red target which  is burned into all our brainstems), it's a win at almost any price.  That said, unless Facebook, which is after all at it's core not much more than a very ubiquitous blog, uses the capital being made available to them to diversify their business model somewhat they will be a questionable investment indeed when they do go public.  The investors who will benefit most from the IPO are those who already have a % of the private entity (Barbara Boxer stands to make a killing).  Right now though Facebook is like a huge monocrop of  GMO corn.  One rogue bacteria could wipe it out on any given Sunday.

Mercury's picture

Good points.  The astounding success of Facebook also surprises me in light of the fact that AOL, once king of the Internet, quickly went down the tubes because it was a closed community platform that didn't offer all the possibilities of the wonderful World Wide Web - it had been developed before there was much on the web.  Just as they merged with Time-Warner AOL became sooo yesterday.

Then, just a few years later, when everyone and their grandmother had a web page,  along comes Facebook which knocks it out of the park by offering a closed community platform re-branded as "social networking."

snowball777's picture

I'm reminded of the Carlin line: "Think of the average guy....half of society is dumber than him." And they all have more plastic than frontal lobe volume.

snowball777's picture

A dark pool is born.

topcallingtroll's picture

Why should we have any regulation of securities?  All it does is fool people into believing they can trust whoever is peddling the stuff and they don't have to think for themselves.  Abolish the SEC but have all trades in all financial instruments disclosed in real time by the name of the trader.  Simple yet effective, and very cheap.

EvlTheCat's picture

Thank you Reggie for the continuing education.

Kina's picture

Are the main stream media simply dumb, incompetent or part of the scam? I plumb for them being dumb and incompetent.

The squid didn't get the appelation Vampire for nothing. Sucking the life out of its victims drop by drop.

covert's picture

makes me wish I were liquid enough to buy goldman stock. until then I will stroll down wall st and have a few drinks along the way. see You there.