The big business story of the day is Facebook’s IPO, which is being described in the press as “modest,” a “whimper,” “fall[ing] short,” “sputter[ing],” “underwhelming,” and “a ho-hummer,” to pick a few choice terms. As even most of these articles acknowledge after their doom-and-gloom leads, these descriptions are wrong. The company (and some early shareholders) sold $16+ billion worth of shares to the public and the company is now valued at more than $100 billion. By contrast, the very-successful-in-retrospect Google IPO in 2004 sold about $1.67 billion to the public and valued the company around $27 billion.

The press finds its disappointment in the absence of a “first day pop.” A pop is the difference between the price a company is selling at and the price buyers were will to pay on that same day, so it’s often, rightly, described as “money left on the table.” A pop makes for a more exciting story, but doesn’t directly benefit the company or its shareholders.

Who does benefit? Traditionally, the good clients of the underwriters, who have just been given free money. And, indirectly, the underwriting investment banks, who have earned the goodwill of – one might argue “bribed” – those clients. The historical justification for this underpricing is that IPOs are risky and, to convince customers to invest in them, the price has to be a bit discounted. In particular, the IPOs are supposedly more volatile (riskier) because the price is a guess by the company and its bankers, who survey potential buyers, rather the result of trading in a liquid market.

But this latter condition didn’t really apply in Facebook’s case, thanks to the trading of Facebook shares in secondary markets. While those secondary markets probably overpriced the shares due to limited supply, they established a plausible range. (Late buyers in the secondary markets, who ended up paying a 10-15% premium over the first-day price, do not come off as great stock pickers.) Similarly, the Google IPO dutch auction was intended to set a fair initial price for the market.

Google’s IPO was described in similar disappointing terms to Facebook’s. One would think the press would have learned a lesson by now. (And some have.) But, instead, the absence of a pop becomes a “fizzle” in most of the press.

Is Facebook a successful business? It appears so. Did the company (and early investors and employees) successfully trade previously illiquid shares for cash at a price the market thinks is fair? I think so. Is it worth its current market cap? Time will tell. Will the stock go up or down? Yes.

Update (May 22): On the other hand, if the underwriters had inside information that revenues would be lower than estimates and shared that with some customers but not the general public, that seems wrong. Ethically wrong and legally wrong. Under those circumstances, the IPO would not reflect an honest, fair market valuation; instead, it would be little better than a pump and dump penny stock scam on a grand scale. I expect we’ll hear more in the next few days and I’m withholding judgement until more information is available.

(Disclaimer: This is my personal blog. Comments here reflect my own opinions, not those of my employer. Facebook and my employer compete in some areas; in addition, many of my friends work for Facebook. You can assume I’m very biased here, just in multiple, contradictory ways.)

Over my vacation, I read Kurt Eichenwald’s Conspiracy of Fools, which is a wonderfully entertaining, novelistic narrative of Enron’s history and collapse. More on that in future posts, but having just finished that book, I choked when I read this in the New York Times’s hagiographic profile of Henry Paulson from Sunday:

Most notably, he advocated bundling bad loans into off-balance-sheet entities that theoretically would allow banks to improve their financial standing. The plan was a total flop and yet another signal that Mr. Paulson underestimated the severity of the problem.

I’m sorry, but how would that have helped? Isn’t this just an accounting trick? Isn’t the issue that these loans are not being repaid? I can understand the value in writing the loans down, but moving them off balance sheet without writing the loans down just shifts the problem around. Something’s very wrong with the state of accounting if this is what the Treasury Secretary is recommending.

I read today’s NY Times article on Silicon Valley millionaires who don’t feel rich with a mix of amusement and annoyance. With a few exceptions, it doesn’t feel like the Silicon Valley I know — perhaps it’s just that, when I’m in the valley, I tend to hang out with hard core engineers. I’m astounded by the folks who consented to be interviewed and gave such idiotic-sounding quotes.

There’s one thing that the article does get right, other than the high cost of living in the bay area, which is that it does feel like everyone I know who made money in Silicon Valley credits luck as the first factor in their success. I think that’s right.

But the main thing that I’ve noticed among people who are still working after having made a lot of money is that money does not seem to be the reason they’re working. First, the typical Silicon Valley engineer, regardless of where they’re from, seems to have grown up with a middle class work ethic; absent work, they don’t know what to do. Second, people who work in tech usually have a sense of progress which is very tied to technology; when engineers think about making a contribution to the world, it’s often in terms of new technology — clean energy, a new programming language, organizing the world’s information, etc. Finally, most of us do like our work, at some deep level; how many Silicon Valley engineers do you know who wouldn’t putter around with technology in their spare time?

What in this changes when someone makes money? From what I can see, very little.

And what’s the alternative? Managing one’s estate? I think most engineers don’t want to become full-time financial advisers to themselves. Philanthropy? I’ve heard a lot of admiration of Warren Buffet’s approach, keeping working and giving away money to someone who knows how to give it away well. Playing golf or flying planes? There’s some of that, but it’s hard to get a true sense of accomplishment from most hobbies. I don’t think Silicon Valley should aspire to recreate the English upper classes of the 19th century, which seems to be the vision the Times article had for the wealthy.

As an aside, I know a good number of people who’ve gotten off of the treadmill and are retired. Some are happy, some are not, mostly the same as they were before retiring.

About five years ago, I bought life insurance for the first time. We’d bought our house in the previous year and our son was about to be born, so it seemed like a prudent thing to do. I shopped around and got a good deal from Western Southern Life on a five-year term policy. For the next five years, they debited $19.50 a month from my checking account and, in case I died, a significant portion of our mortgage would be paid off; I thought we were both happy with this arrangement.

For reasons not related to my satisfaction with the company, I was planning on letting the policy expire. Then, earlier this week, I got a letter from Western Southern saying “The recent change in your Pre-Authorized Check payments will become effective with the next withdrawal from (my bank account).” Hmm, what’s this about? No “Would you like to renew?” note. No “Here are some policy options for you” call. Just “We’re changing your billing.” (Admittedly, we recently moved, and perhaps some mail was lost in the forwarding process? I don’t think that’s been happening, but how do I know for sure?)

But the stupid part is how much they changed: the monthly premium went up to $244.50. (More than twelve-and-a-half times more.) When I called to not-so-politely decline this coverage, I was told that, as I hadn’t called to change my policy, they just put me on one of their “standard rate” policies.

So, this company, which I’d had a good feeling about before, just became a swamp of leaches and con-artists in my mind, luring customers in with good deals and waiting for them not to notice the increased debits. How many people fall for this trick? For how long?

Why would a company that’s trying to build long-time relationships with customers do this? Don’t they see that this gives them a sleazy, fly-by-night reputation? Don’t they see that anyone they do this to will never work with them again?