
The US IPO cartel - MaysonL
http://blogs.reuters.com/felix-salmon/2011/06/07/the-us-ipo-cartel/
======
shawnee_
It could probably be rationally argued that cartel behavior is as destructive
as (or more destructive than) monopoly behavior in a capitalistic economic
system.

In a monopolistic situation there's almost always incentive for those
"outside" the monopoly to weaken or disband the monopoly's stronghold; if
enough individuals join together and engage in cartel behavior _independently_
from the monopoly, the market at least turns into a duopoly. However, in a
cartel situation where there's no threat of duopoly or oligopoly, there's
_more_ incentive to join the cartel than there is to attempt to disband the
central monopoly that's essentially controlling the cartel. It's almost like
high-level blackmail because it makes the monopoly stronger while weakening
the incentive to compete "outside" the monopoly.

For example -- my favorite soapbox issue: the National Association of
Realtors. They could be likened to a cartel of people unified in their
incentive to keep their "spread" around 6.x percent. These IPO financiers are
likely in the same boat: they all know and silently agree that they're better
of keeping their spread at 6.x or 7.x percent than they would be going off on
their own or using their "little" money to compete with the "big" money of
IPOs.

------
daniel-cussen
By the way, that big black line on the 7% level is the data, not part of the
chart design.

~~~
skimbrel
Yeah, it took me two minutes to figure that out. And then it really sank in.

~~~
mmaunder
Likewise. I was like: OK, I guess there's a bit of clustering...HOLY CRAP!

------
lefstathiou
In banking we have a common - perhaps trite - word to explain this phenomonen:
"precedents". We price/measure almost everything against precedents or
"comparables." The fact that 95% of underwriting spreads have been 7% for the
last 20+ years will ensure that 95% of future IPO's will continue to be
underwritten at 7% for the next 20.

Is what it is. The law of unintended consequences tells me that should the
govt try to mingle with this practice, the outcome will likely be that
bigger/more desirable companies get preferred treatment (like Google attempted
to do) at say 6-7% while the relatively smaller companies pay a
liquidity/desirability premium to make up for it. Same thing happened to
credit card rates, which are now at all time highs...

~~~
barrkel
That narrative doesn't explain the discrepancy. Why hasn't competition altered
the rates?

~~~
tedunangst
Would you be more likely to eat at a restaurant that had a big "Tips are only
10% here" sign in the window?

~~~
barrkel
If one restaurant has a "default" service charge of 10%, and another has 20%,
it very probably will sway me to the 10% one, yes (these figures will be
printed at the bottom of the menu, are normally added to your bill but you can
ask to have them removed, and the menu will be at the door or window, visible
from the street, I believe it's a legal requirement). But then tipping culture
is different in the UK.

I understand what you're trying to get at - giving investment banks an
incentive etc. - but the high degree of conformity doesn't make sense. Even
large slices of small pies won't interest banks much, and similarly only a
small slice of a huge pie ought to interest them plenty.

~~~
tedunangst
The point wasn't really so much about the incentive, but just that service
fees are often cultural. Conformity doesn't come from economic forces, but
cultural ones.

~~~
jamesaguilar
I think there's a big difference between service fees on a $10 dinner and a
$100 million-$5 billion IPO. In particular the extent to which they are
affected by custom is probably different considering the size of the sums. And
the reason for the "tip" . . . nobody feels bad about giving an investment
bank as little as they can get away with, but with tips it's a different
story.

------
tedunangst
7% is also the realtor commission when buying/selling a house. It's rarely
negotiated and totally divorced from the amount of work the brokers do.

But I question if there is always a cartel whenever service fees lump
together. If you collected the percentage of dinner checks paid as a tip,
you'd see an enormous concentration right around 15-18%. Are all the waiters
colluding? Even the ones where tip is not included?

~~~
ghshephard
In California, when you (A) Hire a realtor and (B) List your home, the seller
determines both the sellers and buyers commission, and it's 100% negotiated
(well, the sellers commission is. You just chose the buyers commission). Not
sure where the myth of "6%" (not 7%) commission came from. I paid my realtor a
2% base fee + a 5% kicker on anything above a base amount for selling my
condo, and a flat 2% to the buyers agent. Took her six weeks of open houses to
sell my place, and overseeing the renovations, and she cleared a net 2.3% on
the final price. (this was in 2006) - She was with a top tier realty agency as
well, Caldwell.

Can't comment on other locations, might be different.

~~~
tedunangst
I've heard from several homesellers who were quite convinced either you
couldn't negotiate down (or that you wouldn't want to), unless you were doing
repeat business. There may be some more flexibility now because I think people
are getting increasingly frustrated and looking to alternatives.

Oh, found an article from 2004, so things have been changing for a little
longer than I thought, but I think it makes clear that 6% was not always a
myth. <http://online.wsj.com/article/SB109364276315603265.html>

------
michaelochurch
If the American people knew what really goes on around IPOs-- especially how
they're priced and allocated-- the streets would be littered with the heads of
top bankers. This is one or many areas in which banks are willing to outdo the
imagination in terms of sleaze.

------
Helianthus
"European IPO fees do not cluster."

I'm sorry, but this is obviously not true; there are clusters on exactly 3, 4,
5, and (faintly) 6 percent in the European market. And given that forcing to
arbitrary whole numbers _happens_, it suddenly seems very possible that in a
(larger) market like the US the forcing acts even stronger.

In other words, we need _evidence of collusion_ to determine for sure if there
is a cartel, not just evidence that it is the same.

That said, however, the difference between actual collusion and accidental
collusion isn't that thin.

------
suking
Interesting analysis. Nothing will ever happen or be investigated though. The
banks run the WH.

~~~
rayiner
Except that isn't really true. For example, after the Rajaratnam case, SEC
insider trading investigations are way up and a lot of people are getting
arrested. <http://www.cbsnews.com/8301-504083_162-20031043-504083.html>

