Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

by Matt Taibbi

How did they manage such extraordinary results? One answer was that they used a practice called laddering, which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs and Worthless.com comes to you and asks you to take their company public. You agree on the usual terms: you’ll price the stock, determine how many shares should be released, and take the Worthless.com CEO on a “road tour” to meet and schmooze investors, in exchange for a substantial fee (typically 6–7 percent of the amount raised, which added up to enormous sums in the tens if not hundreds of millions). You then promise your best clients the right to buy big chunks of the IPO at the low offering price—let’s say Worthless.com’s starting share price is 15—in exchange for a promise to reenter the bidding later, buying the shares on the open market. Now you’ve got inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day-trader schmucks who only had the prospectus to go by: you know that certain of your clients who bought X amount of shares at 15 are also going to buy Y more shares at 20 or 25, virtually guaranteeing that the price is going to go past 25 and beyond. In this way the bank could artificially jack up the new company’s price, which of course was to the bank’s benefit—a 6 percent fee of a $500 million or $750 million IPO was serious money.