Facebook’s IPO makes Wall Street redundant

I’ve spent my life working with banks and technology firms, trying to align technology with business strategy and vice versa.

And yet it was only yesterday that I realised that these two industries are ripping each other apart.

The fact is that banking was managed in a risk averse way for centuries through diligent book-keeping on paper.

Sure, you had crisis but the crisis would occur in a manageable form.

The Italian Medici bankers lent money to the English thinking Royalty would always pay.

They did not foresee the sovereign default of Edward IV due to poor risk management, although such risks were difficult to avoid given the circumstances of the time.

We still have poor risk management but now it is digitised and, as a result, globalised and turbo-charged.

Such evolution of risk is illustrated well by the flash crash of May 2010 and by the subprime crisis, both caused by incorrectly calculated formula for complex derivatives and market operations.

Neither would have occurred without the technology of today, but the issues are manageable.

It can and will be resolved through logic, and global cooperation to develop new business models of liquidity and market risk that are regulated, resilient and reliable. 

But that is not the digital chasm to which I refer.

Nor is it the one about disintermediation.

We’ve had too much discussion about banks being disintermediated over the past two decades and it hasn’t happened, and will not happen, because it is managed through the regulatory regime.

The regulatory regime means that the core of banking has to be licensed, and that core is therefore protected.

That is the reason why Microsoft, Intuit, Amazon, Google, Virgin, Wal*Mart and more have never broken into the core of banking and why many cannot be bothered, as it’s too darn complex and regulated.

But that is where the logic ends and the new world begins.

And that is where the digital chasm to which I refer appears.

This chasm is the one between the old world mentality of financial and economic models and the emerging new world mentality of digitised globalisation.

Now banks are well aware that they are digitised, globalised behemoths.

As far back as the 1970s – when Walter Wriston, the then Chair of Citigroup, said: “Information about money has become almost as important as money itself ” – we knew that banks were digitised beasts.

Four decades later, Craig Mundie, Head of Research and Strategy for Microsoft, made an even more insightful comment: “What we are seeing is the ability to have economies form around the data and that, to me, is the big change at a societal and even macroeconomic level.”

This gets to the core of Big Data, and the Big Data economy.

Now I can see you already raising eyes to the ceiling and thinking oh no, not another Big Data discussion.

No, this is not.

This is about the digital chasm that rips banking apart.

If we accept that the world is digitised and Big Data leverage is going to make the difference, we then need to look at the other side of the coin: what is going to break the past?

And that, my friend, is where I see the digital chasm causing the haemorrhage to break banking from its past and lay waste to the core of what we thought was our world.

It has already occurred socially: take the Arab Spring and the more recent Occupy Movement; take the Molly Katchpole and Bank of America story or the Aaron Barr of HBGary debacle; and you can see the social change.

The social change is that just one person can now change the world, something I blogged about in February.

Now comes the economic change.

Just as Web 2.0 created Society 2.0, Web 2.0 is now creating Economy 2.0.

The economic change can already be seen, if you look to developments such as Bitcoin, a digitised global currency that works with no central issuing authority.

But the movement is more than a few maverick instigators.

The movement is at the core of Silicon Valley.

What?

Yes: the core of Silicon Valley wants to rip the banking system apart.

Not by disintermediating it, but by making it completely redundant.

How did this hit me yesterday?

Where does this come from?

It comes from Facebook’s imminent IPO and the Financial Times summary of what’s going on.

Here’s a précis:

Facebook IPO puts bankers on back foot

As Wall Street makes final preparations for the largest technology debut by value in history, it has also faced what some bankers and investors have come to see as a series of snubs from Facebook.

From the sidelining of the banks through the registration process to the dithering of Mark Zuckerberg, Facebook’s co-founder and chief executive, over whether or not he will turn up for the investor roadshow, the message has been clear: whatever the normal rules governing Wall Street initial public offerings, Facebook is the one calling the shots. The notion that Mr Zuckerberg has even considered steering clear of such a key event in the build-up to an IPO that investors have long been waiting for, is just one illustration of the bargaining power he and his social networking company, with 900m users and counting, wields over some of the world’s most dominant banking institutions.

“I look at Wall Street as broken, from the point of view of Silicon Valley,” says Roger McNamee, an established tech investor and founder of Elevation Partners, the $1.9bn fund.

Facebook’s handling of its offering is taking the slowly shifting power dynamic in favour of Silicon Valley to a new level in its historically tense relationship with Wall Street; a tension that stems from bankers’ success in the 1990s “bullying” often young management into deals benefiting investors more than the companies, according to Silicon Valley veterans.

Google’s co-founders Sergey Brin and Larry Page are credited by these industry insiders as being the first technology entrepreneurs to wrest significant control of the IPO process away from their bankers back in 2004 …

Reuben Daniels, partner at EA Markets, a boutique investment bank, adds that a more common view has developed among tech entrepreneurs that Wall Street is a service provider rather than offering essential insight or relationships …

[Facebook] has maintained tight control of the entire [IPO] process, including -- in a rare move -- writing its own registration filing with very little input from the banks, according to people familiar with the situation. It has also hired 31 banks to help sell its stock and attract the specific investors it seeks, compared with the 10 more typical for this size of deal …

One banker involved says his biggest worry is whether the power that Facebook wrests from Wall Street will set a precedent for future tech IPOs.

That last line is the one that resonates with me: where a company that is just eight years old has Wall Street afraid, something is changing.

The other line in the above which jarred was the comment from Roger McNamee, founder of Elevation Partners, the $1.9 billion fund: “I look at Wall Street as broken, from the point of view of Silicon Valley”.

Wall Street isn’t just broken from the view of Silicon Valley, but it’s broken from the view of many: regulators, governments, corporations, society, academia and more.

The NGOs are marching; the Occupy movement is rife; the digital community are connecting; and the world is changing.

Will this mean the destruction of the old world and the creation of a new?

Possibly and, even if it does not, it will mean a severe test of the mettle of the old world as they grapple with the new.

For example, if Wall Street is broken, in the eyes of Silicon Valley, where can they look towards for the future?

Take note: 

China tells IPO bankers to Like Facebook

After a regular two-day training session for IPO sponsors in Beijing on April 23-24, Facebook’s listing prospectus has become a must-have accessory in China’s investment banking circles. At least three senior CSRC officials praised the quality of Facebook’s prospectus in their speeches during the seminar.

“The CSRC reckons Facebook’s information and risk disclosures are exceptionally full and tailor-made, which is exactly what they want domestic IPOs to do in the future,” said a banker who attended the session.

We sure do live in interesting times.