Noting the extravagent bonuses paid top Goldman Sachs bankers, Tyler Cowen posits:
My take: The high payments solve an agency problem and align interests, and thus they are relatively invariant to competitive pressures. If Goldman does an IPO, the issuing company wants to make sure that Goldman promotes the issue properly. This means, among other things, that Goldman eschews pure market-clearing prices and instead places the issue in the hands of investors who will talk it up and promote it. For this to happen, Goldman has to care more about its relationship with the hiring, security-issuing firm than about some of its external relationships, namely other groups which would like to buy into the offering at favorable prices but which would not promote it as effectively (NB: this is not the only relevant conflict of interest problem, it is just an example).
In other words, the company doing the IPO has to pay Goldman lots to ensure their loyalty.
Uh-huh. Anh how much does the IPO firm have to pay GS for the persistent underpricing of IPOs by investment banks? If GS really is loyal to its clients, why are so many IPOs so persistently mis-priced (and always underpriced)? Anyway, one of the commenters to Tyler's post made a key observation suggesting that something else is going on:
Important note: GS made most of its money this year on the back of principal investments, not investment banking. So the question is not why aren't there more people in I Banking, but why aren't there more people in trading, hedge funds and private equity. And the answer to the question is: the numbers involved in these areas are growing every day. GS is the largest hedge fund manager in the world, it's private equity funds are a huge player, and as it reduces the number of agency traders it is simulataneously increasing the number of principal traders. To think of GS as a company populated by I Bankers is incorrect. It is literally the worlds largest hedge fund
