Is Goldman a Vampire Squid on Facebook's Face?

January 25 2011 tweetmeme_style = 'compact'; tweetmeme_source = 'wallstCS'; Email This

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There’s confidence, then there’s bravado.

Goldman Sachs (NYSE:GS) is acting more insecure than ever with an incredibly pompous payment structure for private placement shares of social networking site Facebook. According to Bloomberg Markets Magazine (via Business Insider), the investment banking deal doesn’t have only placement agent fees, it also includes a Vampire Squid Clause:

The firm would levy a 4% placement fee on clients, plus a .5% “expense reserve” fee. It would also require investors to surrender 5% of any profits, known as “carried interest,” according to a Goldman Sachs document.

This is Everything Wrong with Wall Street Today

We can debate whether Wall Street owes society a fiduciary duty. But the Vampire Squid Clause is an affront to the efficiencies and benefits of capitalism.

As my boss told me on my first day as an investment banker, “Don’t get a big head. You’re nothing more than a glamorized used-car salesman.” In other words, all I did was repackage and sell interests in used businesses. Goldman is doing just that when they connect prospective investors with Facebook. Nothing more, nothing less.

Is making a connection worth a carried interest in future returns? ABSOLUTELY NOT. This isn’t Goldman’s hedge funds or trading desks where Goldman is actually creating value in the underlying businesses or generating trading profits. Investment banking is an agency service. Goldman is nothing more than a broker for its clients and Facebook.

If investors and companies are willing to give a middle-man a percentage of upside returns (of course Goldman carries no risk — the clients hold all that), we are agreeing that a percentage of the value created by the hard working employees of the company and the risk-taking investors should be skimmed away from the capital’s best use. For capitalism to thrive, risk-takers must be fully rewarded for taking risks, and businesses must be fully rewarded for adding value to society. An agent, of course, is entitled to a flat fee.

Facebook Employees and Investors Should be Livid

Kudos to billionaire Jim Clark for exposing this thievery. Additional kudos for finding another company willing to broker the deal for a cheaper and fairer price. Every other prospective investor should step up and do the same.

Additionally, employees of Facebook should be pissed. They are most likely working ~100 hours a week and dedicating their lives to the company. That makes the Vampire Squid Clause even more insulting — especially when you consider Goldman’s investor network is reached with nothing more than phone calls, emails, and private placement memos full of cut-and-pastes by some first or second year ibankers working for what amounts to less than minimum wage per hour.

Rip Off the Vampire Squid

So, Facebook employees, investors, and prospective investors: rip it off! Rip off that Vampire Squid so capital markets and capitalism can continue breathing.

Don’t Miss: Mark Zuckerberg to Facebook Users: F You, Suckers. >>

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More on this topic (What's this?) Goldman's Facebook Deal Highlights the Dangers That Wall Street is Creating For Main Street (Money Morning, 1/14/11) The Goldman Uncertainty Principle of Securities Regulation (naked capitalism, 1/18/11) What's Really Behind Goldman's Facebook Investment (Money Morning, 1/7/11) Why Goldman Did Not Quite Value Facebook at $50 Billion "“ Not Even Close (The Contrary Investing Report, 1/13/11) Read more on Goldman Sachs Group, Investment Banks at Wikinvest Sharing Is Cool tweetmeme_style = 'compact'; tweetmeme_source = 'wallstCS'; Email This

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