Turn the Goldman Sach's Library into a bowling ally? The roadshow is a circus sideshow? And the individual investors?-All suckers! So goes director of TheStreet.com, James Cramer's, take of the capital markets process. As he ranted and raved passionately during his keynote address at the Financial Technology Expo at NYC's Jacob Javits Center, the audience got one message loud and clear. Individual investors are being "screwed" and he doesn't like it one bit.
Well, he used to like it, when he started his hedge fund back in 1987. He tells the audience the tale of how he, himself, played a part in the cycle that duped the individual investor into buying stocks long after they had "popped."
At that time he tried to get his offices as close to the Goldman Sachs library as possible. "How else would I be able to get all of the information I needed, promptly, to make investment decisions?" He explains that he had many edges over the individual-one being, the early institutional call. "At that time, that meant I would be able to buy stocks in the morning and then spend the rest of the day trading out of them as the call got passed on from the institutional sharpies to the slower, less aggressive individuals." He could research news and figure out its impact before the next day's paper would come out, "so I'd be able to anticipate the public's reaction and profit when they took action on the news that I had found out the day before."
His point of view now that the Internet has changed the landscape? "The library at Goldman? ... Give me a personal computer, a phone, line and a good search engine--you can keep that library ... turn it into a bowling alley." The early institutional call? "Heck I get that simultaneously with the rest of the world) from the most important analyst on Wall Street, Maria Bartiromo on CNBC," Cramer spouts. And so the story continues, as the playing field is beginning to be leveled.
Where does the system breakdown? The one area that hasn't changed a bit? The roadshow, says Cramer. "This is where the big changes are going to occur."
Making an example of "National Gift Wrap & Web"-his father's company-Cramer takes the audience through a fictitious initial public offering, explaining why the company owners and the public are still "the losers" in this process.
He explains that although the company's share price is set by the bankers at the roadshow-based on the value of the company and the initial interest garnered-that price is often nowhere near where the stock opens. As the individual investors clamor to get a piece of the deal, the price soars, and opens at unfathomable heights. Who benefits from the "pop?" Certainly not the company. And just as the individual investors are starting to buy their shares at outrageous prices, the knowing institutions start selling, making a bundle at the individual's expense. Then the company watches its share price deflate-back to more reasonable levels-setting shareholders in an uproar. Cramer knows this scenario all too well, as it happened to his company, TheStreet.com when it went public.
How can we make this system fair? Cramer has a simple solution. "You put on one roadshow on Broadcast.com. You have a nationwide or worldwide chat with the public and the press ... No question gets asked or answered that isn't heard by anyone. As new stuff comes out, you update the prospectus online. The day comes to go public; you simply match up the orders and the company adjusts the number of shares the company or insiders or anybody can sell, online, realtime ... and the price is settled." "We know we can do that with the technology we have right now. Nobody gets ripped off."
Despite attempts by the likes of W.R. Hambrecht and Wit Capital to produce a fair online auction system, Cramer says, here "the audience is getting suckered once again." He points to the quality of companies that go public on line. "... Another MI5 operation ... you have companies that aren't good using a system that's fair, and the public gets screwed again. We need to have good companies in a fair system." When will we have such a system? Who knows, but after enough of these "sucker" induviduals hear Cramer's passionate war cries, a revolution is bound to begin.