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
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.
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