The IPO Scandals

My thoughtful colleague Scott Herhold is a skeptic about the idea that there was anything seriously wrong when investment banks got fees that were much higher than normal after allocating hot technology IPO stocks to investors willing to pay those higher fees. Scott wants to know who the victims were, or whether these practices were even illegal.

It may well have been legal, another example of the truism that it’s often what’s legal that’s the scandal, not what’s illegal. But it wasn’t right, in part because it cynically fed hot air into a speculative bubble that was bound to collapse.

The victims were all of us, and especially the people who rely — obviously foolishly — on the idea that the markets won’t be gamed by insiders. The IPO mania was all about shifting risk from the well-informed insiders, the people who surely knew they were selling garbage companies, to the less-informed public shareholders. Yes, the latter were greedy, and to some degree deserved what they got. But they didn’t know what kinds of games were being played by the insiders.

Scott talks about “choreographed” IPOs. That’s a good word. The insiders were doing their best to ensure that stocks would go up the first day, creating the impression of a company that everyone just had to own. The folks who paid high fees to get shares tended to flip the shares, getting easy and quick profits. The banks got their fees coming and going. Who lost? The little guy, as usual.

Maybe, as Scott suggests, a truth commission is a better idea than a hanging. But here’s one bit of truth we don’t have to hold hearings to learn — the insiders helped each other make billions, and the suckers lost big-time.

I worry about the corrosive effect all this will have on future investors. I hope it doesn’t sour an entire generation on responsible investing.


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