Facebook, AOL, and the Subprime Mess of 1998

Facebook is about to go public. Whoopee! Here's how an IPO works: all the private equity firms that have been funding a startup's operations get to cash out, recovering their seed money and then some. I'm not a Facebook user, but I get the model, though my doubts about the company stem from this basic belief: what's to prevent a bunch of low-cost competitors from offering the same service? Remember how hot AOL was 15 years ago? The only reason I bring this up is that it reminds me of the subprime IPO frenzy of the late 1990s and early 2000s when Wall Street was bringing subprime firms public at dizzying pace. (Remember Cityscape Mortgage?) And we all know how that ended. The problem with capitalism in a free society boils down to this: once a great idea is discovered everyone tries to copy it until they screw up the profit margins for the firms that were “first in.” But let's think about mortgage banking for a second: residential finance is (now) a tightly regulated business that is recovering (barely) from a five-year depression. Who in their right minds would want to invest in a mortgage banking firm? Oh, but investors are out there, waiting for their moment. Wilbur Ross is not alone…