Financial Innovation, Huh?

When you go to to the casino and gamble, you know that you are likely to lose.  It's how they set up the games. 

They know the odds, and they know the numbers, and even if there is a way to beat the house (counting cards) they will blacklist you.

So I am completely unsurprised to find out that the Wall Street banksters made out like raped apes while the investors got screwed during the SPAC mania.

Whenever you hear about financial innovation, hold onto your wallet.

Nothing will change until we start seeing the head of the Wall Street firms frog marched out of their offices in handcuffs:

Investment banks have raked in billions of dollars by feeding the frenzy for blank-check companies, and they have done so largely without risking any of their own money on hundreds of deals that have left many investors with punishing losses.

A look at one of these deals shows how.

In late 2020, Acies Acquisition Corp tapped into investor demand for blank-check companies – formally known as special purpose acquisition companies, or SPACs – with an initial public offering that raised $215 million. Among the investment banks Acies signed up to underwrite the IPO were JPMorgan Chase & Co, Morgan Stanley and Oppenheimer & Co.

When the offering closed, Acies, essentially a shell company, followed the SPAC template. With the cash it had raised, it had two years to find and merge with a private company seeking a stock market listing, or return the money to investors. Acies’ management team announced it was on the hunt for a business in the “experiential entertainment industry.”

The team didn’t have to look for very long. Hours after the IPO closed, bankers advising Playstudios Inc contacted Acies managers to tell them the Las Vegas-based maker of mobile casino games was for sale, regulatory filings show. Those bankers were also with JPMorgan. In early 2021, the two companies announced plans for a merger that valued Playstudios at $1.1 billion.

In the run-up to the merger and the listing of the combined company’s shares, Playstudios touted a rosy future. It forecast that surging ad sales, a new role-playing game and cross-marketing offerings to game players would bring a 20% rise in revenue in 2021 and a 33% jump this year.

Since then, the company has scrapped the new game, and revenue fell far short of predictions. Retail investors suffered the consequences. The stock is down more than 50% since shareholders approved the merger last June.

“Playstudios is one that looks like crap right now,” Dan Ushman, a 37-year-old Chicago-area entrepreneur, said earlier this year. He put about $26,000 into Acies after it announced its deal with Playstudios and soon saw his investment drop more than 35%.

Investment banks involved in the deal fared much better, having risked none of their own money, based on a Reuters review of regulatory filings.

JPMorgan, in particular, pocketed hefty fees for its dual role as an underwriter for the Acies IPO and as an adviser to Playstudios – perfectly legal, despite the apparent conflict of interest, if the bank discloses its role, as JPMorgan did.

The bank has not disclosed its fees, but financial data provider Refinitiv estimates that JPMorgan earned $4.7 million in underwriting fees and $14.2 million as a sell-side adviser. It also received $1.6 million for helping Acies raise additional capital through a maneuver known as private investment in public equity, or PIPE, according to financial research firm Morningstar Inc and a Reuters analysis. PIPEs, which tap big institutional investors, are often necessary to close a SPAC merger.

Morgan Stanley earned about $5.9 million and Oppenheimer about $1.2 million in underwriting fees, according to Refinitiv estimates. Each bank also got about $1.6 million in PIPE-related fees, according to Morningstar and a Reuters analysis. LionTree Advisors, another Playstudios adviser, earned $6.2 million on the deal, according to Refinitiv estimates, plus $1.6 million in PIPE fees, according to Morningstar and a Reuters analysis.

JP Morgan, Morgan Stanley and LionTree declined to comment. An Oppenheimer spokesman said the bank had a minor role in the Acies IPO.

Playstudios noted that the JPMorgan teams it and Acies worked with came from separate divisions of the bank. The company said it has “a robust framework for evaluating, approving, executing and optimizing its game initiatives,” and that it is continually “revisiting the conditions and decision to either advance or suspend an initiative.”

………

The SPAC market has sagged since the collapse of some high-profile blank-check listings amid overall grim market conditions. And in March, the U.S. Securities and Exchange Commission (SEC) proposed new rules that would increase disclosure requirements and potential legal liability for SPACs and their banks. Facing these market and regulatory challenges, some banks have been pulling back from the business.

Whatever happens to the SPAC market, the Reuters examination reveals in detail for the first time how, over the past couple of years, Wall Street banks have enriched themselves by aggressively promoting the deals in the absence of the legal guardrails and financial risks associated with traditional IPOs.

Fraud enforcement against high finance is woefully lax.  This needs to change.