March 11, 2013

Why Hire Them

Pretty mind-blowing story from Joe Nocera about how Goldman Sacks rigged the IPO process of a tech company (EToys). The company sold stock at 20 bucks a share. It immediately went to 77 bucks a share (it was 1999, these sorts of things happened.) Good for people who got the stock at the IPO price, terrible for the company, which missed out on hundreds of millions of dollars.

This being America, a lawsuit followed and it turns out EToy's banker Goldman Sack not only deliberately set the stock price too low to give its preferred clients the bump, it took kickback (in the form of "commissions") of up to 50%. I.E. Goldman Sacks gets me stock I can buy at $20 that's really worth $78 and I give Goldman half of what I make. Great scam.

But why do companies stand for this? This is not little old ladies getting taken by Nigerian E-mails. These are real companies, with accountants and lawyers and Boards of Directors. How can such people get taken like this? Are they really that dumb? Is Goldman really the only game in town?

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