Wall Street's role in the Facebook IPO

Facebook CEO Mark Zuckerberg delivers a keynote address during the Facebook f8 conference on September 22, 2011 in San Francisco, Calif. His company could file the paperwork for an initial public offering as early as today.

Jeremy Hobson: Facebook is expected to file paperwork as soon as today to sell stock to the public. The company has reportedly picked the Wall Street investment bank Morgan Stanley to lead its IPO.

Marketplace's New York bureau chief Heidi Moore joins us now to talk about Wall Street's role in the Facebook IPO. Good morning.

Heidi Moore: Good morning.

Hobson: So Heidi, why does Facebook need these Wall Street firms in order to make this IPO happen?

Moore: Going public just means Facebook is going to sell its stock to the public for the first time to raise money. And to raise the most money, they need to reach the most people. Investment banks spend all day selling stock to people, so they know everyone who wants to buy stock; they have these big, really thick Rolodexes.

I talked to Brett Paschke. He is an investment banker, the head of equity capital markets for William Blair. And he explained very simply what he does.

Brett Paschke: We have a seller of stock, and we have a buyer of stock, and we're the ones making a marketplace between those two parties.

So investment banks also find out everything that's going to go wrong with Facebook -- or other companies -- and they tell investors that. They run interference for the company.

Hobson: And what do they get out of this situation?

Moore: In one word: really big fees. All right, that's three words. But if Facebook is going to sell something like $10 billion of stock, it's probably going to give around 7 percent of that to the banks as fees, and that's a pretty big pay day.

Hobson: And what if I, as an individual investor, don't want to go through this bank situation -- I just want to go to my E*trade or Ameritrade account and buy the Facebook stock as soon as it goes public. Do I get the same deal?

Moore: No, you wouldn't. As with so much in life, you would need connections. So you'd have to wait until Facebook officially went public and its stock was trading on the New York Stock Exchange or NASDAQ -- and you'd end up paying a lot more.

Hobson: Marketplace New York bureau chief Heidi Moore. Heidi, thanks a lot.

Moore: Thank you Jeremy.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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