[MasTaBlau]

Just a question as I'm a little confused having read through the article you linked.

Is the underwriter obligated to step in and attempt to stabilise the price? Logic would say that if the underwriter was working in the best interest of the IPO'ing company that if the stock tanks as much as it did, there wouldn't be any shares left to short on at a profit as they would have bought them all at IPO price in an effort to stabilise?

It reads almost like it is in the banks interest for the IPO to go badly and the price to drop right after flotation? or am I missing something?

First things first. The Bank's job is to ensure the client gets the funding they're looking for (the client in this case is facebook), so the initial sale is intended to raise as much as possible at the highest price. Anyone who thinks otherwise, morally or financially could end up on the wrong side of a crappy deal.

Let's say I am the bank, and you guys here are the bidders, Lang is Facebook. I have 100 shares to sell and I want to sell them at $10 each - Lang wants to make $1000. Bear in mind, Lang can always buy back the shares.

You guys create demand for 120 shares, however some of you will buy and dump hoping for a spike (hedge funds). So I will throw 120 shares on the market, selling 20 of them short immediately, putting $200 in the bank. As the price drops intraday from those looking to gain from the initial spike selling, I'll use that money to buy back (real shares) to prop up the price - in fact in this scenario I have the ability to hold the market up 20%, usually way more than enough.

When the dust settles (no pun intended) I might be left with some short positions, rarely none. As the price falls, you buy back to a zero delta on the position making a little on the side. If the price rises, then perhaps greenshoe option comes into play, and the client makes more shares available.

The intent is not for the underwriter to lose money, or even to make a killing, it's really about getting the client their funds and making commission. You also may make new clients who want to buy into the IPO.