
Goldman Sachs: The Great American Bubble Machine (2009) - arbuge
https://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
======
rayiner
So read the section that relates to the late 1990s tech boom:

> The basic scam in the Internet Age is pretty easy even for the financially
> illiterate to grasp. Companies that weren't much more than potfueled ideas
> scrawled on napkins by uptoolate bongsmokers were taken public via IPOs,
> hyped in the media and sold to the public for mega-millions. It was as if
> banks like Goldman were wrapping ribbons around watermelons, tossing them
> out 50-story windows and opening the phones for bids. In this game you were
> a winner only if you took your money out before the melon hit the pavement.

If you know something about that tech boom, you'll recognize this description
as mostly (though not entirely) garbage. Given that, what gives you confidence
in the rest of the article?

~~~
titzer
Well, the text is gussied up and there is plenty of dramatic license, but
there were hundreds, if not thousands of startups that fit that description.
Have a look at the meteoric rise and fall of pets.com:
[https://en.wikipedia.org/wiki/Pets.com](https://en.wikipedia.org/wiki/Pets.com)

For every high-profile one, there were dozens smaller ones that rose and fell
on the same wave.

That's not to say that all .com companies crashed and died in that mess, but
there were plenty.

~~~
tptacek
The bar your argument needs to clear isn't whether there were lots of Internet
companies fitting Taibbi's falling watermelon description, but rather whether
there are any that Goldman underwrote. Pets.com was underwritten by Merrill
(also, against the notion that Merrill was packaging any bongwater-fueled idea
presented to them is the fact that Pets.com was majority-owned by Amazon.)

The target of the article is Goldman, not '90s Internet companies.

~~~
microtherion
Goldman underwrote a lot of companies, if anybody wants to dig through the
whole list: [http://www.nasdaq.com/markets/ipos/offering-
history.aspx?exp...](http://www.nasdaq.com/markets/ipos/offering-
history.aspx?expert=goldman%2c+sachs+%26+co&page=24)

The first name I saw that IMHO would qualify as a watermelon was Etoys Inc.

~~~
tptacek
I don't think that's a good example. For one thing, eToys had been in business
for several years before IPO. For another, toys are a surprisingly difficult
logistics problem for retailers (a friend told me stories about the bear of a
time Amazon had with them). But most damning to the narrative Taibbi wants to
sell, Goldman got in trouble with eToys --- _for underpricing it_.

The founder of eToys went on to start Gamefly, and then took over as President
of Gap Direct.

This isn't to say that eToys is a solid company by the standards we set for
modern tech companies. But it's not a watermelon thrown out of a window,
either.

~~~
camelite
> But most damning to the narrative Taibbi wants to sell, Goldman got in
> trouble with eToys --- for underpricing it.

I think you're underestimating Taibi's argument if you think the IPO-ing firm
being pissed off at a later date argues against Goldman pulling off a scam, or
that under-pricing and over-pricing can't be part of the same scam.

There are 4 actors here: a) Goldman b) Goldman's preferred clients c) The
company d) The investing public

The argument goes that Goldman underprices the IPO initially. Their preferred
investors get cheap stock. The stock goes public. The preferred investors have
agreed to buy post-IPO stock. This causes the stock to rise. This rise doesn't
appear to the investing public to be artificial, but a stock with momentum.
This causes the price to shoot up. At some point the insiders take their gain
and sell their stock. They then reward Goldman by channeling a significant
portion of their profits back to them by using their underwriting services.

As a post-script, the thing that first struck me was, if they screw their
clients, how do they get new ones. Well if you read on to the next section,
Taibbi explains part of that puzzle too: "Here the investment bank would offer
the executives of the newly public company shares at extra-low prices, in
exchange for future underwriting business."

Losers: a) The company: they have less money to invest in their company's
success, and fewer "long-haul" stock-holders than they would like. b) The
investing public who buy high, sell low.

Winners: a) Goldman's clients - buy low, sell high b) Goldman - they build
long-term relationships with investors and skim some of the profit back
directly

Here's the eToys guy:

After the deposition, he recalled, the S.E.C. lawyers began to show him some
Goldman Sachs documents. He saw that one big firm after another had been
allocated shares — and had immediately flipped them, even though Goldman had
promised that its clients would support the stock. “That’s when I thought, ‘We
really got screwed,’” Lenk told me.

Although the experience still angered him, he now has 14 years’ worth of
perspective. “Look at what has happened since then,” he said. “If you think
eToys got screwed, what do you think happened to the country?”

“What Wall Street did to us in 1999 pales in comparison to what they did to
the country in 2008,” he said.
[http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-
rigg...](http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-
ipo-game.html)

~~~
prostoalex
> even though Goldman had promised that its clients would support the stock

Maybe Goldman played coy, maybe there was a misunderstanding, or maybe the
eToys guy decided to add some drama, but how can Goldman's investment banking
arm promise anything? As far as clients are concerned, their relationship with
Goldman is through brokerage and wealth management services, they are in full
control of their accounts and can do whatever they please.

This is akin to my bank promising some third party that by Friday afternoon
I'll have a certain balance in USD or some specific precious metal in my safe
deposit box.

The only reasonable scenario where this pledge could ring true would be a
Goldman-managed mutual fund or ETF buying those shares on the other end.

~~~
camelite
> but how can Goldman's investment banking arm promise anything?

Easy: they lie. Why is this so mind-boggling?

> This is akin to my bank promising some third party that by Friday afternoon
> I'll have a certain balance in USD or some specific precious metal in my
> safe deposit box.

You're just explaining why the company shouldn't have believed Goldman. And I
agree they shouldn't. But it appears that they did believe them, for whatever
reason. Perhaps it was the Goldman aura. Perhaps it was their top .01% sales
staff. Perhaps it was knowledge derived from their client relationships
concievably allowing them to choose long-term over short-term investors.

Whatever. But Goldman being skillful liars is not some bizarre left-field
theroy.

~~~
prostoalex
What's the difference between a late-stage private round and a public
offering? The shares start floating the day of the public offering. For
general public to buy those shares, someone has to sell. To paraphrase Eastern
philosophers, if the company goes public, but the daily trading volume for
their ticker stays at 0, did it really go public?

But who's going to sell? The company no longer can, having sold the initial
allocation to IPO subscribers the day prior. The employees or early investors
cannot - they have a lock-up period mandated by SEC.

Only those who subscribed to the IPO at more or less market prices can sell,
so almost by definition a successful IPO with good trading volume involves a
lot of flipping.

What would be a successful IPO in eToys interviewee's book? An opening bell
sound and no activity?

------
paulpauper
Then why did Goldman's stock and earnings fall so much in 2008? if they
engineered all these bubbles obv they would have had the foresight to be
unscathed during crisis, which they weren't. There is no conspiracy. Hedge
funds where the ones bidding the prices higher and many lost money on the way
down. Goldman does not single-handedly control the market.

~~~
calafrax
> There is no conspiracy

Aren't corporations, by definition, a conspiracy to make money? Conspiring to
make money is what an investment bank exists to do. It would be dereliction of
duty if they weren't conspiring to make money.

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padseeker
I knew as soon as I saw the title and that it was published in Rolling Stone
that it was written by Matt Taibbi. He has a flair for the dramatic especially
with anti-corporate perspective.

~~~
supernumerary
It's interesting that 'vampire squid' stuck though. Also his work with Mark
Ames in Moscow at 'The Exile' through the 90s was stellar and very funny to
read.

~~~
padseeker
Don't get me wrong - I enjoy Matt Taibbi's writing. I generally agree or am
sympathetic to his perspective. I think Goldman Sachs has been bad for most
Americans.

However I think you need to take what he has to say with a grain of salt. I'm
one of those liberals that won't take their own side in an argument. I like
his writing and agree with its sentiment but I do think his writing is more
editorial, rather than adhering to the ethics of journalism. It is in the same
vein as Michael Moore. He has a perspective, and his content is more about
validating his opinion as opposed to doing true investigative journalism.

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sidcool
I recently watched the documentary Inside Job. It's on the 2008/09 financial
crisis. It quite convincingly alleges Goldman and Citibank of creating a
bubble and betting on it. A recommended watch.

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daxfohl
Well bitcoin et al seem to be the bubble machine of the day. I wonder if
Goldman has managed to get a foothold into rigging that market as well, given
that the whole premise of those markets is decentralization, anti-fiat, anti-
rigging.

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CharlesDodgson
hmm.... anyone want to buy some Snap shares?

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snarfy
Please add (2010) to the title.

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vermontdevil
This was written in 2010.

~~~
jaclaz
Actually written in 2009, last line: >This article originally appeared in the
July 9-23, 2009 of Rolling Stone.

