Felix Salmon:
Where banks really make money on IPOs: Every time an IPO has a big pop on its opening day, the same tired debate gets reprised: did the investment banks leading the deal rip off the company raising equity capital?… I had sympathy with the bankers…. Today, however, I have to take all of that back. And it’s all thanks to Joe Nocera, who has a great column this weekend, where he uncovers a bunch of documents in one of those interminable securities lawsuits against Goldman Sachs. The documents should have been sealed; they weren’t. And now, thanks to Nocera, we can all see exactly where Goldman makes its money, when it comes to IPOs….
The lawsuit in question concerns the IPO of eToys, back in 1999. The company sold 8.2 million shares, raising $164 million; Goldman’s 7% fee on that amount comes to $11.5 million. If Goldman had sold the shares at $37 rather than $20, it would have received an extra $10 million — and what bank would willingly leave $10 million on the table?
What Nocera has discovered, however, is that Goldman was not leaving $10 million on the table. Instead, it was making more than that — much more — in kickbacks from the clients to whom it allocated hot eToys stock...
