"That lawsuit, believe it or not, is still going on."

March 11, 2013 1:36 PM

Where Banks really Make Money On IPOs

All of these numbers are hypothetical, of course, but the bigger point is simple: if Goldman manages to get kickbacks, in terms of extra commissions, of more than 7% of its clients’ profits, then it has a financial incentive to underprice the IPO. And Goldman’s clients were desperate to give it kickbacks: they didn’t just route their standard trading through Goldman, since that wouldn’t generate enough commissions. Instead, they bought and sold stocks on the same day, at the same price. Capstar Holding, for instance, bought 57,000 shares in Seagram Ltd at $50.13 per share on June 21, 1999 — and then sold them, on the same day, at the same price. Capstar made nothing on the trade, but Goldman made a commission of $5,700. Capstar’s Christopher Rule says that in May 1999, fully 70% of all of his trading activity “was done solely for the purpose of generating commissions”, so that he could continue to keep on getting IPO allocations.

Rigging The IPO Game

Via.
Morgan Stanley To Pay Fine Over Improprieties In Facebook IPO Run-Up
Curriculum Vitae: "the steps by and through which an eager young tadpole fresh from the leafy groves of academe transforms him or herself into a hoary old bullfrog barking orders and swilling scotch from a gilded lily pad."

The very intellectual and personal qualities which make you an attractive and effective candidate for Analyst or Associate become increasingly irrelevant, only to be replaced by interpersonal skills and predilections which are often fundamentally at odds with your prior role and responsibilities. For this reason alone, we see substantial attrition, both voluntary and involuntary, in Vice President ranks across my industry. It is not for nothing my fellow Associates and I made fun, shortly after we arrived, of an aging Vice President at my first firm, who could not seem to make the transition. We dubbed him amongst ourselves a “very, very good Associate.” He did not last very long.

I have said it before: the higher you get in my business, the more it becomes pure sales. Vice President is when a banker really begins to see the truth of this remark for herself, and it is when she (and her bank) must make the determination whether she has the goods to continue.

posted by the man of twists and turns (18 comments total)

I have said it before: the higher you get in my business, the more it becomes pure sales. Vice President is when a banker really begins to see the truth of this remark for herself, and it is when she (and her bank) must make the determination whether she has the goods to continue.

I suppose it's a surprise to me that not everyone knows this. Different worlds.
posted by leotrotsky at 2:04 PM on March 11, 2013

If this wasn't a "known" during the first dot-com boom -- the subject of the case mentioned here -- it was certainly assumed to be the case. It's increasingly hard to find online archives from that period, but the news sites and magazines at the time (Red Herring, Business 2.0, The Industry Standard) weren't shy about suggesting that underwriters could essentially force their investor clients into buying IPO stock, whether as a carrot ("buy X amount of this dubious IPO and we'll keep you at the top of the list for the good stuff") or as a stick ("buy X amount of this dubious IPO or we'll drop you.")

The morality (or legality) was secondary to the fact that it was making people money.
posted by holgate at 2:06 PM on March 11, 2013

Facebook's IPO was personally very satisfying. I didn't buy on the IPO, watched the banks get screwed along with a lot of big guys. I jumped in when it was oversold and got away with an easy profit.
posted by humanfont at 2:17 PM on March 11, 2013 [2 favorites]

Previously (and also via Felix Salmon), the US banks have probably been price-fixing IPO fees. The interesting thing is that there didn't seem to be any need for them to be price-fixing those fees since that wasn't where they were making their profit from anyways.
posted by mhum at 2:17 PM on March 11, 2013

I think it's misleading to say they get their profits "from" something or another. Money is fungible. You make profits from having more total income than total expenses. Every bit you can squeeze out from any possible source, including price-fixing, counts towards the margin.
posted by I-Write-Essays at 2:24 PM on March 11, 2013 [1 favorite]

The money quote is at the end, where it's pointed out that if you think eToys got fucked, take a look at the country circa 2008.

At the very least, these assholes should be in a minimum security prison somewhere, forced to eat Kraft singles all day and forced to watch Maury reruns on a black and white set.
posted by klangklangston at 2:29 PM on March 11, 2013 [2 favorites]

I-Write-Essays: Every bit you can squeeze out from any possible source, including price-fixing, counts towards the margin.

Yes, of course. What I meant to convey is that there was no need to engage in the illegal practice of price-fixing since there was already plenty of profit elsewhere. But, I guess this is suggests a sense of statutory invulnerability as much as anything else, i.e.: if you can get away with it -- and we most certainly can -- why not?
posted by mhum at 2:30 PM on March 11, 2013 [2 favorites]

Mhum: I think you've pretty much nailed it.
posted by I-Write-Essays at 2:33 PM on March 11, 2013

What I meant to convey is that there was no need to engage in the illegal practice of price-fixing since there was already plenty of profit elsewhere.

There never comes a time when a large corporation decides that they don't want to make more money.
posted by ssg at 2:34 PM on March 11, 2013 [3 favorites]

Why are you people looking backwards? This is America, we only look forwards here. You can't see criminal activity if you refuse to look backwards, thus no crime occurred.
posted by T.D. Strange at 2:35 PM on March 11, 2013

ssg: There never comes a time when a large corporation decides that they don't want to make more money.

Again, yes. But, I think most companies don't routinely engage in pretty obvious price-fixing despite the potential upside because of fear of the downsides. I was just observing that these most recent revelations show that the upside in the case of IPO fees were so paltry compared to their other profits that it almost didn't seem worthwhile in engaging in this kind of cartel behavior. Unless, they calculated that the probability of being caught multiplied by the ensuing penalties (both financial and reputational) was less than the excess profits due to price-fixing. Which, of course they did.
posted by mhum at 2:43 PM on March 11, 2013

Goldman's ability to make most of its profit on kickbacks from the eToys IPO seems like an example of market failure to me. If there were a large number of medium to small sized investment banks, no single bank could seize a dominant share of IPO business like this and start acting like the mafia.
posted by Kevin Street at 3:05 PM on March 11, 2013 [1 favorite]

klangklangston: "At the very least, these assholes should be in a minimum security prison somewhere, forced to eat Kraft singles all day and forced to watch Maury reruns on a black and white set."

It's ok, they can watch Maury on a flat screen. As long as it's a (preferably small) LED lit LCD and mounted high on a wall inside a cage so they still have something to annoy them. No sense in wasting electricity, after all.
posted by wierdo at 3:16 PM on March 11, 2013

So if we go by the maxim that the measure of a civilization can be taken by looking at how it treats the worst among them, I'd say that — given the way we've treated these crooks — we're a very nice civilization indeed.
posted by You Can't Tip a Buick at 4:02 PM on March 11, 2013

But seriously, we shouldn't throw these guys in any sort of jail, especially not one set up to give them annoying miserable lives. Instead, we should sentence them to a special tax regime, where every single penny they make over (say) 22,000 dollars a year is sent directly to the federal government. For the rest of their lives. Adjusted for inflation, of course.

They can live fulfilling lives, they can contribute to society, they can keep all the abstract freedoms that every other free American gets to have.

But they can't get rich.
posted by You Can't Tip a Buick at 4:09 PM on March 11, 2013 [6 favorites]

Seems to me that nobody deserving of that kind of treatment would have any difficulty at all in working around it.
posted by flabdablet at 7:02 PM on March 11, 2013

On the Nocera IPO rigging article, the companies themselves are not wholly innocent either. First, management and employees typically get options with a strike price set at the IPO price, so they benefit greatly from an IPO day pop, even if the company itself does not.

Second, for most of these companies, raising capital may only be a secondary purpose of the offering. The primary purpose is to get a high public company valuation so that the company would have currency to make acquisitions, attract talent, and allow their venture capital backers to get out at a high price. For all of these purposes, what matters is the post-IPO trading price, not the IPO price itself. (Which is why you see many of these companies IPO only a small percentage of the shares, like 5-10%.)

Two companies that did the opposite were Google, which did an auction that sought to set the price at, you know, what the market would bear, and Facebook, which seemed hellbent on getting to a $100 billion IPO perhaps because that seemed like a cool number.

Market failure indeed.
posted by zittrain at 7:53 PM on March 11, 2013

flabdablet: Well, I kind of meant it as more of a thought experiment on the nature and ends of punishment, but in a way I also think raising the possibility of financial shenanigans w/r/t the 22k-a-year punishment isn't a reason to dismiss it out of hand. It's sort of like objecting to the idea of keeping people in a room indefinitely because people are really good at walking out of rooms, and then refusing to consider the possibility of putting bars over the exit.

But I mainly meant it as a thought experiment. I'm not comfortable subjecting anyone to inhumane conditions, not child molesters, not killers, not even the mediocrities who run Goldman Sachs. 22k a year, though, would serve as a deterrent, wouldn't be cruel to the people punished, would allow those people to live fulfilled lives (if they're interested), would allow them to work (even in finance, though they wouldn't get to keep the money), would allow them to contribute, and wouldn't, y'know, waste their lives. Prison, though, prison gets in the way of all of those things, even without the sadistic punishments involving televisions that we've been fantasizing about inflicting.
posted by You Can't Tip a Buick at 8:09 PM on March 11, 2013