Joe Nocera wrote an opinion piece for the New York Times on May 20, 2011, asking “Was LinkedIn Scammed?” by the Wall Street Investment banks that managed its I.P.O. He argued persuasively that it was—that the managers priced the shares low to benefit clients other than LinkedIn (NYSE:LNKD). They priced the shares at $45. They opened at $83, rose over $120, and closed the day at $94.25, an increase over 100 percent. That’s a pretty big miss.
Misses are to be expected, but a miss of over 100 percent? It does seem that some clients are more equal than others. With friends like that, LinkedIn doesn’t need enemies.
I don’t know whether LinkedIn was “stiffed” or not, to use Mr. Nocera’s term, but the alternative of gross incompetence isn’t all that reassuring either. A miss over 100 percent at least calls their competence into question. Mr. Nocera’s article stirred some longstanding but unspoken doubts I’ve long harbored regarding investment banking Wall Street style. What do they do to earn such high fees and why don’t others do it cheaper, especially if they aren’t doing it well.
My doubts bubbled up briefly during Senator Levin’s grilling of Goldman Sachs (NYSE:GS) last year. Selling products deliberately designed to fail, especially in cahoots with someone planning to short them, didn’t seem right. I think I understood Goldman’s rebuttal about “making a market” by being on both sides, and being net long some of the time and net short other times, but it wasn’t all that convincing to me. What settled the matter for me, or what kept my mouth shut about it, was Senator Levin’s over-the-top bullying. It’s not easy to make Goldman a sympathetic underdog, but he pulled it off.
These are recent developments. My questions and doubts about Wall Street are longer standing and go beyond the ethics of particular transactions, and are more related to competence than ethics. I’ve always wondered, for example, why Wall Street attracted the best students from our most prestigious universities. They go for the high pay, of course, but why was the pay so high relative to other high-skilled professions? Why didn’t competition from other equally bright students not drive salaries down to earthly levels? I understand that these questions are too naïve for my readers, but it is confession time.
I thought I learned in school that wages are determined by the supply and demand for labor and that the demand was derived from the marginal revenue that the worker adds to the firm. No doubt 25 year old graduates of the Harvard Business School can add much value. But how much more can they add than the cream of the crop at other good universities? Do the professors at Harvard know secrets that professors at the University of Texas can’t learn and teach? Why hasn’t greater supply moved us down the demand curve?
Why haven’t regional investment banks bid down the exorbitant fees of their Wall Street counterparts? And while I’m in confession mode, what is there about hedge fund managers that allows them to charge fees so much higher than other money managers. Are they just brighter? Surely, the ability to go short as well as long can’t account for all of it it. And why does everybody assume that those who run private equity funds can, almost by definition, turn around a failing business when the founders and experienced owners of the business are unable to do so. No doubt some people are more talented than others, but why isn’t there more of a continuum in talent and income?
I have these questions, but I don’t have the answers. They don’t lead me to want to interfere with income determined by the market. I just want to understand it better.
One other question: how can California have house prices so much higher than other states year after year without emigration evening it out more than it has. I know that the tan and beautiful people have fancy jobs and incomes, but, when I travel there, I wonder how the cab driver and others can afford to live there. I know that the answer must be climate, climate, climate, but you can’t eat climate. I’ll take Texas and good air conditioning every time.