> But most damning to the narrative Taibbi wants to sell, Goldman got in trouble with eToys --- for underpricing it.
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...