Last week, the buzz on Wall Street was about how rich Facebook’s initial investors would be by the weekend. Today, it’s about how much investors might lose in the IPO — and whether NASDAQ and Morgan Stanley have some explaining to do. As prices dropped well below the IPO initial bid on trading this morning, the Wall Street Journal reported that NASDAQ might have to indemnify against some losses thanks to technical problems with cancel orders on Friday:

Of course, the cancel order difficulty would just be a footnote if the stock had risen in value, even if the rise didn’t keep pace with the hype. Today, however, Facebook is trading at three dollars a share lower than the IPO price, and fingers are pointing at Morgan Stanley for artificially keeping the price up on Friday to avoid embarrassment in the IPO:

Facebook Inc. FB -11.49% shares slid toward $35, well below its initial public offering price of $38, on just its second day of trading, a black eye for all those involved with the social networking company going public.

Facebook shares traded at $35.01, down 8.4%, or $3.22, from Friday’s close and putting the company’s valuation under $100 billion.

It is usually considered disappointing for a new stock to fall below its offer price so quickly, and particularly so for the most heavily traded IPO of all time.

Oddly, whenever the price of the stock dropped back on Friday to the initial price, a wave of orders flooded the market and lifted the stock again.  Yahoo Finance notes a Reuters story to accuse Morgan Stanley of trying to cover its own bets with fresh orders, but warned that the strategy couldn’t last forever:

There is no certainty in the world of IPOs, but some (like Reuters) pointed to what probably happened: “The underwriter, Morgan Stanley stepped in to support Facebook’s stock when it fell toward its $38 IPO price shortly after it opened, a source familiar with the matter told Reuters. The shares spent much of the last hour of Friday trading near that price, with onlookers watching to see if it would post a $37.99 price — which it did not.”

Reuters also sketched out how it probably happened: “Lead underwriters in a stock essentially ‘short’ the stock through what is known as an ‘over-allotment’ of shares — they sell shares to the market that they do not own. If the stock has trouble, which Facebook did, the underwriter supports it by then buying more stock at the IPO price.

And, finally, Reuters gazed at what will probably happen from here: “The bank will not support the stock indefinitely.”

Perfect? For Facebook insiders, certainly. They left no money on the table. For all other traders, hardly. They’ll be left holding the bag.

Someone will be left holding the bag, certainly, if the value doesn’t rise back to its initial price.  NRO’s Michael Auslin scolds Morgan Stanley for its apparent manipulation, and wonders why they applied a “too big to fail” mentality to an untested offering in the first place:

If there was no appetite for the stock, why shouldn’t it have dropped below the opening offer price? Isn’t that what the market, and its supposedly superior ability to translate information into economic value, is designed to do? If you bought Facebook on Friday, then you apparently got stuck with overvalued stock. How does Morgan Stanley’s action increase confidence in the market’s rationality and unbiased functioning (let alone Morgan Stanley’s judgement)? I guess that’s why I’ve never been offered a job in the world of high finance.

I’ve never been a big fan of Facebook. Like Rich and others, I find it a waste of time, and pretty creepy that people post personal details from their lives for all to see. However, I’m looking forward to posting on my Facebook page my disbelief that it was considered too big to fail.

We will see whether investors find value in Facebook in the long run.  Until then, it’s good to remember that a name alone doesn’t guarantee value, and that IPOs are still risky — and should be.