Matt Levine (money stuff http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s... ) said:

And yet more Uber
Huh. Here’s Leslie Picker at CNBC:

"Uber’s underwriters, led by Morgan Stanley, were so worried the company’s initial public offering had run into trouble, they deployed a nuclear option ahead of the deal last week, so they could provide extra support for the stock, four people with knowledge of the move said."

This level of support, known as a “naked short,” is a technique that goes above and beyond the traditional help a new offering can get.

In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.”

But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure.

The naked short,[5], is a fully at-risk way to support the deal: The underwriters sell even more stock short at the deal price, and then buy it back in the open market if the stock goes down or up. If it goes down, they make money. If it goes up, they lose money. If it goes up a lot, they lose a lot of money.

Most IPO stocks go up in their first few days, and many go up quite a lot. Underwriters generally price IPOs for a nice early pop. So naked shorts are fairly uncommon. Underwriters only go naked short on an IPO if they are pretty sure that it is a dud, one of the minority of offerings that will quickly trade below the IPO price.

But it is hard to communicate that. While Morgan Stanley was deciding to go naked short the Uber IPO, it was also putting out happy noises about how much demand there was and about how the deal would be priced conservatively to ensure a nice pop. There is a fine line to walk here: None of those statements seem to have been untrue (surely the underwriters had at least three times as many orders as they had shares, which is actually not that great, and the deal was priced near the low end of the already conservative-seeming range), but the overall implication was that they were confident that the stock would go up. They were not confident that it would go up. In fact, they were so confident that it would go down that they put their own money at risk on that bet. But they didn’t lie to anyone. They were just marketing; the underwriters were doing what they could to make people excited about Uber’s stock, so that those people would want to buy the stock, so that it would go up in the aftermarket. An IPO is a sentiment-driven process, and the underwriters’ optimism or pessimism is contagious; if you want the deal to go well you have to say that it’s going well. Without lying, I mean. The worse it is going, the harder that is to do.

On the other hand:

"Some of the bankers tried to console market participants prior to the opening of trading by telling them that there would be additional support from the naked short, said one of the people, who asked not to be named discussing private conversations."

If you’re telling some people “buy as much as you can at $45, this deal is hot,” and telling other people (in “private conversations”) “this deal is a dog but at least we have a naked short,” then that is awkward.[6]

The other awkward thing is of course that the underwriters made money on their naked short; the more the stock went down, the more money they made. (And the bigger their naked short was—the more sure they were that the stock would go down—the more money they made.) This is not the point of the trade; as far as Uber’s underwriters are concerned, the naked short was a noble and self-sacrificing effort, done at considerable risk to themselves, to stabilize the stock and protect the interests of their issuer and investor clients. But, yeah, they made money on it. Depending on how big the naked short was and when they covered it, it’s quite plausible that Uber’s underwriters made more in trading profits than their $106.2 million underwriting fees.[7]

If you were … inclined to be critical … you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money.