Goldman Sachs: The Great American Bubble Machine (2009)
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> The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
If you know something about that tech boom, you'll recognize this description as mostly (though not entirely) garbage. Given that, what gives you confidence in the rest of the article?
For every high-profile one, there were dozens smaller ones that rose and fell on the same wave.
That's not to say that all .com companies crashed and died in that mess, but there were plenty.
The target of the article is Goldman, not '90s Internet companies.
The first name I saw that IMHO would qualify as a watermelon was Etoys Inc.
The founder of eToys went on to start Gamefly, and then took over as President of Gap Direct.
This isn't to say that eToys is a solid company by the standards we set for modern tech companies. But it's not a watermelon thrown out of a window, either.
Can we agree that WebVan was a watermelon company?
I was a Webvan customer in San Francisco, and it was better than anything I had for 10+ years afterwards.
Be careful about what you're trying to argue. If Taibbi was just arguing that Goldman participated in the startup market, and that most startups fail, he'd be saying something true but banal. But that's not what Taibbi's saying. He's saying something that's not banal, but also probably not true.
I think you're underestimating Taibi's argument if you think the IPO-ing firm being pissed off at a later date argues against Goldman pulling off a scam, or that under-pricing and over-pricing can't be part of the same scam.
There are 4 actors here: a) Goldman b) Goldman's preferred clients c) The company d) The investing public
The argument goes that Goldman underprices the IPO initially. Their preferred investors get cheap stock. The stock goes public. The preferred investors have agreed to buy post-IPO stock. This causes the stock to rise. This rise doesn't appear to the investing public to be artificial, but a stock with momentum. This causes the price to shoot up. At some point the insiders take their gain and sell their stock. They then reward Goldman by channeling a significant portion of their profits back to them by using their underwriting services.
As a post-script, the thing that first struck me was, if they screw their clients, how do they get new ones. Well if you read on to the next section, Taibbi explains part of that puzzle too: "Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business."
Losers: a) The company: they have less money to invest in their company's success, and fewer "long-haul" stock-holders than they would like. b) The investing public who buy high, sell low.
Winners: a) Goldman's clients - buy low, sell high b) Goldman - they build long-term relationships with investors and skim some of the profit back directly
Here's the eToys guy:
After the deposition, he recalled, the S.E.C. lawyers began to show him some Goldman Sachs documents. He saw that one big firm after another had been allocated shares — and had immediately flipped them, even though Goldman had promised that its clients would support the stock. “That’s when I thought, ‘We really got screwed,’” Lenk told me.
Although the experience still angered him, he now has 14 years’ worth of perspective. “Look at what has happened since then,” he said. “If you think eToys got screwed, what do you think happened to the country?”
“What Wall Street did to us in 1999 pales in comparison to what they did to the country in 2008,” he said. http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigg...
Nocera's argument is that not only was eToys not an exploding watermelon, but Goldman's IPO shenanigans possibly prevented it from surviving the 2000-2001 startup collapse.
I don't see how the two arguments can be compatible.
Note that it's not enough to observe that Goldman can be shady. It has to be shady the way Taibbi says it is, or else all Taibbi is doing is appealing to our emotional beliefs about Goldman. That's not journalism.
Maybe Goldman played coy, maybe there was a misunderstanding, or maybe the eToys guy decided to add some drama, but how can Goldman's investment banking arm promise anything? As far as clients are concerned, their relationship with Goldman is through brokerage and wealth management services, they are in full control of their accounts and can do whatever they please.
This is akin to my bank promising some third party that by Friday afternoon I'll have a certain balance in USD or some specific precious metal in my safe deposit box.
The only reasonable scenario where this pledge could ring true would be a Goldman-managed mutual fund or ETF buying those shares on the other end.
Easy: they lie. Why is this so mind-boggling?
> This is akin to my bank promising some third party that by Friday afternoon I'll have a certain balance in USD or some specific precious metal in my safe deposit box.
You're just explaining why the company shouldn't have believed Goldman. And I agree they shouldn't. But it appears that they did believe them, for whatever reason. Perhaps it was the Goldman aura. Perhaps it was their top .01% sales staff. Perhaps it was knowledge derived from their client relationships concievably allowing them to choose long-term over short-term investors.
Whatever. But Goldman being skillful liars is not some bizarre left-field theroy.
But who's going to sell? The company no longer can, having sold the initial allocation to IPO subscribers the day prior. The employees or early investors cannot - they have a lock-up period mandated by SEC.
Only those who subscribed to the IPO at more or less market prices can sell, so almost by definition a successful IPO with good trading volume involves a lot of flipping.
What would be a successful IPO in eToys interviewee's book? An opening bell sound and no activity?
That is a Taibbi metaphor if there ever was a Taibbi metaphor.
Aren't corporations, by definition, a conspiracy to make money? Conspiring to make money is what an investment bank exists to do. It would be dereliction of duty if they weren't conspiring to make money.
They did't need any foresight to predict that their bonus money would remain ing their bank accounts no matter what happened. And for that matter, that whatever DID happen, the the US Government would move heaven and hell to avoid Goldman collapsing.
However I think you need to take what he has to say with a grain of salt. I'm one of those liberals that won't take their own side in an argument. I like his writing and agree with its sentiment but I do think his writing is more editorial, rather than adhering to the ethics of journalism. It is in the same vein as Michael Moore. He has a perspective, and his content is more about validating his opinion as opposed to doing true investigative journalism.