When stocks are hot, you can make money in initial public offerings (IPOs). Wall Street had a phrase representing the so-called confidentiality between corporate finance departments and research—the “Chinese Wall.” In practice, the Chinese Wall was a joke; it should’ve been the “Chinese Fall.”
When big IPOs came to market, the research department at the firm I worked for would always issue a “Buy” rating a few weeks thereafter. Even though many of these IPOs declined on the stock market after listing, I never once saw a “Sell” rating. It was an industry-wide, 100% conflict of interest. Research analysts (an expense for the firm) had to toe the line set by corporate finance (the firm’s fee generator). Analysts knew they would get fired if they didn’t cheerlead. Ratings of IPOs were—and still are—totally fraudulent.
And that’s what Wall Street is really good at: packaging a product and selling it to the marketplace for a cut. Nothing else matters but the money. When I was a stockbroker, my boss would tell me to go hang out with real estate agents, doctors, and dentists. Instead of cold-calling potential clients, I called the trading floor to solicit views. Needless to say, that career path quickly ended. They did offer me another job, but I said, “No, thanks.”
Wall Street is a system. At the retail full-service level, Wall Street is always hiring. They learned from the insurance industry that hiring stockbrokers is just a numbers game. Bring them in, do sales training, get the broker’s assets from their family and friends, then repeat. Turnover is high. At the institutional level, it’s a bit of a different game; but no matter what, the sell side only sees you as a dollar sign. Trust me: that’s what a stockbroker is trained to do, not research the market. That’s why Wall Street pays so well.
There have actually been some really decent IPOs recently. A number of IPOs came out last fall, and the timing was perfect, as these IPOs caught the market’s change in sentiment perfectly. Most of the best-performing IPOs are small-caps; a couple of new restaurants and technology companies are really moving.
According to PricewaterhouseCoopers, 2012 saw Wall Street bring in 146 new IPOs (including Facebook, Inc. [NYSE/FB]), raising $42.9 billion. This compares to 134 IPOs raising $35.5 billion in 2011. There were 12 IPOs this January that raised $4.6 billion—the most since the financial crisis hit in 2008. Of the five largest IPOs in 2012, four are now sitting above their initial offering prices. For 2011, three out of the five remain above their offering prices.
Wall Street is entirely in the business of using someone else’s money to get a piece of the action. At the end of the day, Wall Street doesn’t care about how others view it; its only purpose is to keep the cash-sucking machine running, and it will do whatever is necessary to do so.