The Facebook fiasco continues to unfold, and the damage is yet to be fully known, but in the end it is doing harm to the capital markets and to all of us. The reality is that NASDAQ computers were not properly programmed to handle today’s high speed and complex trading. The NYSE has done a remarkable job in designing and implementing a system that can handle anything with minimal glitches. It is the gold standard. NASDAQ management never really understood the technical issues, and did not spend the capital, the time, nor did it hire the right staff to develop the systems required. Neither the CEO nor the COO seemed to grasp what was really required. Zuckerberg and his CFO and Morgan Stanley were informed of the weakness of the NASDAQ system months before the offering, but chose to reject the admonition. Things played out exactly as they had been warned they would, and they should have stopped the offering at 11:00 that morning when they saw it happening, and they should have known what was coming next, because they had been warned. The system issues at NASDAQ were not a secret, so it is not that various people were unaware, and had not brought it up to Zuckerberg. Just think for a second, a 28 year old kid who knew nothing about the capital markets, was controlling a major capital markets event. Add to that, the fact that the CEO of NASDAQ was in Face Book office with Zuckerberg instead of in New York. The COO of NASDAQ was at home taking the day off that morning. There was no top manager in the office that day to handle the crisis on the spot. The IT people who had created the bad program were also not equipped to deal with it. Morgan Stanley, to its defense, was not able to properly perform its support role because it was unable to get any accurate trading information to know what was required to provide good support. The offering should never have been allowed to go forward given what a number of people knew and how it was unfolding. Now we have what some estimate is $250 million of trading losses, and all sorts of investigations, when the issue was right there and known from the start by several people. Now it is out of control and the stock may go to $27, or who knows where it settles out. The screw up was avoidable.

Here are the ramifications for all of us. This was a last straw for many investors as to the capital markets and Wall St. They have watched the past couple of years, and they now see that nobody from Lehman, Countrywide or MF Global has gone to prison in what many consider a lot of bad acts. Whether there was really criminal liability is not for me to judge, but the perception is very widespread that a lot of top managers skated away, and that just feeds the Obama attacks on Wall St. The Face Book mess, after the Madoff scam, just convinces people the system is rigged and the people at fault walk free while investors get hosed. That is one part of why it is so hard to raise a fund today. Why family offices and institutions want to bring it in house and control their own destiny. One would think that there should be floods of capital to professionals to invest in this environment, but as we have seen, even some of the really good professional managers have struggled, and in some cases failed, to raise their funds.

None of this is good for value creation. While there is a load of capital around, much of it is in private hands and not all of it is sophisticated enough to properly invest. Or, it is so scared right now, it is just sitting in Treasuries. We end up with the bifurcation of investing with far too much capital chasing the main markets and driving cap rates down to silly levels, and no capital going to the smaller mid west and southern markets where the risk is less if properly invested because the going in yield is much higher, and the market is not so volatile. Exit might be harder, but if you buy well, you can exit well if you are patient.

It is very hard to know where all of this is going to resolve itself. When you add the vast uncertainty of the fiscal issues and tax issues in Washington, the dysfunctional nature of the entire US government, a Euro collapse of some sort being one possible event, and then add on Iran, Syria and Egypt, then we surely did not need Face Book to further complicate the capital markets at this time. Coming on top of the JP Morgan trading errors, the public and many institutional investors are just fed up, scared or plain hunkered down in the bunker. None of this helps markets get right. On the other hand, one can argue that many will say, stay away from the stock markets and bond markets, and buy cash flowing US real estate and collect checks as the safer haven. All that European and Chinese flight capital has to come out of Treasuries some day. We have a very long way to go to get to stable markets, and along the way some very bad events will surely intercede. There is no real alternative to good sound investing for the long term. Strong, honest sponsors with good deals, will almost always trump a quick buck.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.