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Goldman Sachs and Uncle Sam’s “Games People Play”

Posted by Larry Doyle on August 17, 2010 7:42 AM |

Why does it seem that whenever something really dicey happens on Wall Street, the crowd at Goldman Sachs is typically in the middle of it? How so? Let’s enter the world of new issue equity underwriting.

There is very little that is truly sacred on Wall Street. That said, one of the traditional “sacred untouchables” on the street of dreams has been the new issue equity underwriting spread. Maintaining this spread between a cushy 2% to 3% level is typically sacrosanct and actually more easily maintained now given the oligopoly that currently defines Wall Street. I have written extensively on how this game of oligopoly has been played on Wall Street circa 2010.

Well, a new twist on this game has been played as Goldman Sachs has broken rank and undercut the rest of Wall Street in the bidding for the recent IPO (initial public offering) of General Motors stock. Bloomberg recently reported, Goldman Undercuts Rivals in GM IPO as It Loses Top Role:

Wall Street banks led by JPMorgan Chase & Co. and Morgan Stanley stand to make a combined $120 million on General Motors Co.’s initial public offering. If it weren’t for Goldman Sachs Group Inc., they could have made four times as much.

In a pitch to the U.S. Treasury in May, Goldman Sachs offered to accept a fee of 0.75 percent, according to people with direct knowledge of the matter. That’s a fraction of the 3 percent banks typically charge on the largest IPOs and well below the 2 percent offered by Bank of America Corp. and other banks that presented to Treasury, said the people, speaking anonymously because the matter is private.

Goldman Sachs, which had just been sued for fraud by federal regulators and has ties to GM competitor Ford Motor Co., didn’t get a top role in the IPO. The government imposed the fee pitched by Goldman Sachs President Gary Cohn and his five-person team on all underwriters, angering the banks, the people said.

“The fact the other banks are furious at Goldman is not surprising,” said Samuel Hayes, a professor emeritus of investment banking at Harvard Business School in Boston. “They feel it gave the government a real lever to force down fees on the underwriters. But the deal still has a lot of marquee value.”

So, is this just standard competition at work in which Goldman is playing hardball? That is not what many on Wall Street believe. What do they think is going on here? Nothing short of the fact that Goldman did Uncle Sam’s bidding in undercutting their Wall Street brethren as payback for the fact that the SEC went easy on Goldman in the settlement of fraud charges brought against Goldman a few months back.

Is this outside of Goldman’s standard modus operandi? I addressed How Does Goldman Sachs Operate? a year ago and wrote:

….one needs to appreciate the fundamental nature of Goldman’s business model. If a firm is going to take large principal risk positions both within proprietary books and customer books (trading accounts used to trade with clients), two factors are of overwelming importance: information and relationships.

Goldman worked both of these angles very, very hard. Goldman developed extremely close relationships with the largest customers in the market and the largest power brokers in Washington and around the globe.

Was there a direct link between Goldman’s undercutting the competition and a relatively cheap settlement of the fraud charges? Whether there was or not, the perception on Wall Street is that Goldman remains very well positioned in ‘playing games’ with Uncle Sam.

American taxpayers may look at the GM IPO and say Goldman did the nation a favor. Really? I’m not sure when Goldman became so altruistic. Think there is a ballgame going on here? For a somewhat more melodious version of this theme, turn up the volume and let’s revisit some of the finest of Soul Train!!

Larry Doyle

Thanks to the friend of Sense on Cents who brought this story to my attention. Please subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

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