Friday, July 17, 2009

Goldman's Recent Underwriting of Banks' Equities

Please check out Matt Taibbi's "Taibblog": . ... Especially the post captioned "The real price of Goldman's giganto-profits":

Wow. Matt makes his points passionately, which makes for great reading.

To his points I'll add a question - why are underwriting fees still (customarily) 7% of proceeds? (See Matt's numbered paragraph 5.)

Point of view #1: current monetary conditions and federal government support (read: bailouts) reduce greatly the risks involved in Goldman's bank* clients' recent equity capital raisings, including the usual underwriter's risks for which a portion of the underwriting fees are in effect insurance premia. (An example of a type of underwriter's risk is underwriter's liability under the Securities Act of 1933, as amended.)

Point of view #2: the underwriting compensation represents excess returns; that is, the compensation is more than should be expected to result -- in a competitive market -- based on the underwriting risks Goldman assumed, the talent and capital it brought to bear, and the time/opportunity cost involved.

*Bank holding companies, more accurately.

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