El-Erian: Facebook Selloff Highlights Need for Open Markets

Monday, 20 Aug 2012 09:04 AM

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Facebook shares are down 50 percent since going public in May, and that’s a good thing for both the company and the country, says Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund.

The company’s shares have taken a beating on concerns that despite having more than 900 million users, monetizing that base will prove difficult.

Markets have been brutal on Facebook, and that’s a good thing.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

“In all this, the company’s standing and its credibility have taken a material hit that, only a few months ago, would have been deemed not just unlikely but unthinkable. No wonder some suspect that morale at Facebook is low; and no wonder [Mark] Zuckerberg felt it necessary, according to media reports, to address his company’s stock decline which, according to a Wall Street Journal article, he deemed ‘painful’ for some employees,” El-Erian writes in a CNBC column.

“Ironically, all this may actually be good for Facebook in the long run,” he continues.

“Every successful company requires periodic reality checks which, in many cases, lead to beneficial course corrections. Indeed, the most successful companies do their utmost to hardwire as many reliable checks and balances as possible.”

Politicians can learn a lesson from Facebook’s plunging shares, as investors in U.S. debt won’t be as forgiving as they have been in the past if spending remains unchecked.

“[T]he company will help send a message to all those politicians who are way too eager to broad-brush public markets as a whole with the spectacular failures of a few segments,” El-Erian writes.

“Well-functioning markets have played, and will continue to play, a critical role in maintaining the entrepreneurship and discipline that are essential to America’s traditional vibrancy, its power of invention and innovation and its global competitiveness.”

Shares of Facebook hit $19 Friday, one day after the expiration of a lock-up period, whereby early investors and insiders can now sell their shares, according to The Associated Press. How many major shareholders actually sold their shares won't be available until this week at the earliest, when sellers must disclose such transactions.

Some analysts, however, don’t believe too many investors will be running for the door.

“The only people who would sell are people who need the money,” said Wedbush analyst Michael Pachter, according to the AP, noting that if Sheryl Sandberg, Facebook’s operating chief, or David Ebersman, the firm’s chief financial officer, sell their shares, “I would be very worried.”

“[B]ut they are not that dumb.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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