Facebook finally came public last week and the first day of trading saw the stock basically close flat. The financial commentariat is in a lather over the lack of a first day rise in price. Forbes, for instance, has an article titled The Failure of Facebook’s IPO. That is just one of many articles on the subject, some of them insightful – like the Forbes article – and others not so much. Some seem to believe that an IPO is only successful if underpriced relative to demand.

It is important to remember though who the underwriters are working for when launching an IPO. Facebook is the client and the job of the investment banks involved is to get as high a price as possible. Based on the Forbes article, in this case, the underwriters might have overestimated demand:

Company filings after the market closed on Friday night however revealed the extent to which the banks who led Facebook’s initial public offering – in which $16bn of shares were sold to new investors – were forced to move in to the market and buy shares in order to keep the price above the $38 level. Morgan Stanley, Facebook’s lead financial adviser, ended the day with 162m shares, worth $6.16bn. Other banks including JP Morgan and Goldman Sachs also bought shares, ending the day with $3.2bn and $2.4bn holdings respectively.

Wall Street brokerage firms such as Morgan Stanley are not investment advisers. They are investment banks and if they owe a fiduciary duty to anyone it is the companies for which they raise capital. The brokerage unit of the firm is merely a distribution channel for the merchandise manufactured by the investment bank. If they price an IPO and the shares run up on the first day, their brokerage clients may be happy but they haven’t fulfilled their responsibility to the corporate client. And don’t think it is out of concern for their brokerage clients that they routinely underprice offerings. It is because they don’t want to get into the situation they are now in with Facebook – taking the risk of having to buy shares they don’t want or need. The customers of the brokerage firm must be kept happy of course so they have buyers for the next IPO but don’t ever make the mistake of believing brokerage firms are looking out for your best interests.

So, yes, from the viewpoint of Morgan Stanley, the Facebook IPO is a failure of their investment bankers who overestimated demand and stuck the bank with a big slug of overpriced shares. It most definitely is not a failure from the viewpoint of Mark Zuckerberg and the previously existing shareholders of Facebook. For them it was a resounding success. For the clients of Morgan Stanley and other individuals who bought shares in the IPO or in the immediate aftermarket, only time will tell. Good luck. I think you are going to need it.