There’s a fun game that the big banks like to make when a small (relatively speaking) company goes public: the bank that determines how high or low the initial stock offering should be deliberately lies to both the public and the company offering the stock.

A low offering will benefit the companies that buy a large number of shares at the start and then sell them off when the price explodes and then stabilizes. Joe Nocera at The New York Times explains a clear example of this:

ONCE upon a time, in a very different age, an Internet start-up called eToys went public. The date was May 20, 1999. The offering price had been set at $20 , but investors in that frenzied era were so eager for eToys shares that the stock immediately shot up to $78. It ended its first day of trading at $77 a share.

The eToys initial public offering raised $164 million, a nice chunk of change for a two-year-old company. But it wasn’t even close to the $600 million-plus the company could have raised if the offering price had more realistically reflected the intense demand for eToys shares. The firm that underwrote the I.P.O. — and effectively set the $20 price — was Goldman Sachs.

But did Goldman Sachs just make a mistake? Did they really think the stock had been values at the right price?





What they clearly show is that Goldman knew exactly what it was doing when it under-priced the eToys I.P.O. — and many others as well. (According to the lawsuit, Fitt led around a dozen underwritings in 1999, several of which were also woefully under-priced.) Taken in their entirety, the e-mails and internal reports show Goldman took advantage of naïve Internet start-ups to fatten its own bottom line. Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman’s I.P.O.’s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case.

So, to summarize: companies go to the big banks when they want to go public and sell stocks. The banks, who are very good at determining how much these stocks will sell for (they’re greedy and corrupt, not stupid), deliberately set the price low. Then they alert their “preferred customers” about an “opportunity.” These “preferred customers” buy large amounts of the initial offering, watch the stock price grow to the price it was going to reach originally and sell, sell, sell! They make a huge profit, the bank gets its cut of the action and the company that just went public gets screwed.

What’s even better (for the banks) is that they, so far, have been able to claim that this is legal:

Goldman has argued that, contrary to popular belief, underwriters do not have a fiduciary duty to the companies they are underwriting. In recent years, this argument has held sway in the New York court system, although it has yet to be argued before the Court of Appeals.

This is like going to a doctor and having that doctor not tell you about the tiny malignant tumor he found because he’ll make more money off of the protracted chemotherapy than he would from a quick surgery. This is what happens when banks become “too big to fail” and competition is nonexistent: pure corruption and zero accountability.

And this works in both directions. Recall last year’s historic, incredible, once in a lifetime event! of Facebook going public? The stock went up for sale and people went into a frenzy of buying. Except some of the bigger investment firms skipped the offering. Turns out that Facebook’s business model was far shakier than believed. Some “preferred customers” were quietly informed that the stock was going to tumble. Everyone else was left on the hook. Facebook made money, the bank underwriting the entire deal, Morgan Stanley, made money and the regular investor took a bath. Here’s the full breakdown in all of its gory details.

Again, it’s not illegal to do this.

We already know Wall Street is rigged but apparently it’s not just rigged against Main Street, it’s rigged against anyone not a part of their inner circle. This is what the GOP is fighting for when they insist on relaxing what little financial regulations exist. If you’re rich, you can make the rules, if you’re not, they’ll just tell you it’s a level playing field and you just weren’t smart enough or didn’t work hard enough to succeed. It’s the (Corporate) American way.

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