On the GM IPO Debacle, Part II

In part I, I explained that even if the online/discount brokers (that serve “everyman,” apparently) had gotten allocated GM IPO shares, no matter what Treasury said about every American having access to buy, in practice, it would never go down that way because of the way brokerage firms go about allocating shares.  I may be wrong, but as far as I know, Treasury (besides threatening not to include an underwriting firm in the deal) has no influence over how underwriters allocate shares (someone please enlighten me as to any other authority Treasury has, if any. Thanks).

Now, I really don’t have anything revolutionary to add here and for the purposes of brevity I’m over-simplifying, but I just wanted to add another thought or two.  Even if Etrade, Schwab, and Ameritrade (major advertiser on CNBC, which I suspect may have a not-insignificant part in the network’s annoyingly persistent coverage of this issue)  received allocations of IPO shares, 1. Not every Tom, Dick, and Harry has a brokerage account nor knows how to open one, 2. even if they did, there’s still the little issue of suitability.  On this 2nd point, generally, equity IPO’s are considered to be amongst the least risky of syndicate trades, at least compared to secondary’s, structured products, etc (but certainly not considered risk-less, not by any stretch of the imagination!)  Suitability may vary from firm-to-firm and even from issue-to-issue (e.g. buying an equity IPO from a bankrupt company still married to the Government may require investors clear a higher threshold than a “vanilla” IPO), as firms seek to CYA.

So, the first impediment to “everyone” having access to the GM IPO: brokerage firms choose to whom they allocate shares, not treasury.  Second: even if Treasury was able to influence Brokers’ allocation methodology (doubtful considering the institutional/HNW client outrage that’d result), firms can’t just sell a risky issue to any schmuck with an account (or else they’d get sued/crushed with arbitration claims) into next century if/when things go “wrong” (e.g. the stock goes bankrupt at some point down the road).

The last thing I want to discuss is that even if Treasury HAD explicitly stated verbatim that every American will be able to buy into the GM IPO (and I’ve yet to see any evidence they did), putting the above aside, why do we think EVERY American should be able to buy the IPO?  1. 40% of Americans don’t have any net Federal income tax liability (i.e. 40% of people don’t pay any Federal taxes), 2. why does anyone think just because someone pays Federal taxes they should be automatically qualified to buy-into a questionable IPO?  Whats driving Joe and Jane Outraged Investor’s motivation to get into the IPO?  Does the average retail investor understand dynamics of public offerings, the auto industry, index/fund “frontrunning,” pension accounting, turn-arounds, or any of the relevant factors affecting the performance of the issue?  Methinks not.

So, instead of all of the (mostly) MSM coverage discussing the outrage from “everyday investors” why don’t we get some insight into why these ‘folks want to get into the deal in the first place.  I’ll bet that the responses won’t be much more informed than the testimony given by the NTC employees about their “Robo-Signing” duties (see my Thoughts & Good Reading post from Monday).

Not only do investors need to be protected from predatory practices, they need to be protected from themselves (and firms need to protect themselves from frivolous lawsuits resulting from “improper” conduct and the like).

Securities Law types, brokers, advisors, etc please feel free to weigh in on the issue.