So who's the sucker in Facebook's initial public offering (IPO) today? Any banker will tell you that there is a fool in every trade, which is why you must always know who the fool is, because if you don't, the fool is probably you.

A range of candidates suggest themselves, of whom the most obvious is Facebook. Earlier this week the New York Times reported that the company is paying the bank Morgan Stanley around $35m for its work on the deal. Practically every other major global bank is in on it, too, bringing the total bankers' fees to an estimated $100m.

Why would Facebook pay so much? In its continuing Voices of Finance series the banking blog spoke to a former managing director at a major bank. For years he was the opposite number of those currently managing Facebook's IPO, making £1m a year. It's simple, he says. Corporations pay such huge fees because the global investment banks form "a cartel".

According to free market theory lucrative fees attract newcomers, which drives down prices. But the barriers to entry for new banks are huge, and CEOs at corporations would "rather pay up than go into business with somebody no one's heard of. Reputation is decisive. What's important for a CEO is getting the deal done, not keeping costs down; what's $50m between friends?"

There's an analogy with selling your house, he says. "In the supermarket you diligently compare the price of two packets of tea, with real estate agents you suddenly put up with huge fees. You know they are all the same and do nothing special. But you just don't dare doing it without them." He adds: "If corporations saw how easy most of our work was, they would weep."

But why did Facebook engage so many banks? Two reasons, says the MD, one openly talked about, one an open secret: "Banks have different client bases – relationships with particular investors. More banks means more coverage. Two: each bank has research analysts writing reports for investors recommending them to buy or sell a share. With all the top analysts from all the big banks on board, you won't get dissenting voices".

So is Facebook today's fool? Not so fast. Buying off dissenting voices is a necessary element in creating the impression that the IPO is unanimously popular and incredibly oversubscribed, and therefore "hot". The MD: "If a share was really 'hot', we'd give it to big institutional players in exchange for favours. Allocating 'hot shares' is essentially giving someone money – you know the stock price will shoot up once trading starts."

The favours from big players were never explicit, he explained. Institutional investors would give his bank extra business, say, directing trades its way so the bank made commissions. Or they'd help the bank out by placing an order on another IPO that wasn't hot.

Facebook is a classic example of a hot share, he said. "Retail (individual) investors will be clamouring for stock, but they'll be shafted in favour of the institutions. The stock will probably 'pop' on the first day of trading, and many of those institutions will book an instant profit by selling them into the market. Retail investors will probably be left holding the baby if and when the price tanks."

Which makes individual investors the true fools? Well yes, but let's not forget the biggest group. Those favours called in by the big banks from institutional investors in exchange for "hot shares" cost money. And whose money is managed by institutional investors like pension funds? Yours and mine.

The former MD compares it to insurance fraud: "It seems victimless while in reality everyone's premium goes slightly up." That's the system, he says: a cartel "skimming off everyone's pensions and savings". Read the full interview here to discover how he got depressed and quit.

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