Goldman Sachs Proves Wall Street Didn’t Screw LinkedIn

Jeffrey Weiner, chief executive officer of LinkedIn Corp., is interviewed on the floor of the New York Stock Exchange in New York, U.S., on Thursday, May 19, 2011. LinkedIn Corp., the largest professional-networking website, more than doubled in the first day of trading after its initial public offering. Photographer: Michael Nagle/Bloomberg via Getty Images Photo: Bloomberg/2011 Bloomberg

LinkedIn's IPO may be a few days old, but the tech press can't stop arguing over whether the company's Wall Street underwriters, like Morgan Stanley and Bank of America, purposefully underpriced its shares, robbing LinkedIn of $200 million in lost proceeds. The charges leveled against Wall Street banks are as follows: LinkedIn was priced at $45 a share, but more than doubled on the first day of trading. The difference between the offering price and opening price is referred to as an "IPO's pop."

While some argue that a big pop is a sign of a successful IPO, others, like the New York Times Joe Nocera and Business Insider's Henry Blodget say the mis-pricing ended up benefiting the banks' big investor clients — "rich mutual fund firms like Fidelity and hedge funds like SAC Capital" who could buy the stock cheaply and watch it climb.

According to Nocera and Blodget, Wall Street banks are paid handsomely to know things like whether a company's shares are going to double in price. But Reuters' Felix Salmon has a different take. Salmon argues that although banks do deliberately underprice IPOs, we need only look at the vampire squid's behavior to know that this was more of a foible than a con:

But there’s an even easier way to prove that the banks didn’t know what was going to happen on IPO day. Which bank, after all, is the greediest and most knowledgeable of them all? Goldman Sachs. And Goldman was one of the few investors which sold its entire position at the IPO price of $45 per share. If Wall Street knew that LinkedIn was going to soar into triple digits on day one, you can be quite sure that Goldman would have held on to most if not all of those shares.

This, then, looks much more like a cock-up than a conspiracy. If the banks knew that they could get the IPO away at $80 per share and still see a 15% pop, they would surely have done so. But they didn’t know that, because LinkedIn was the first social-networking company to go public, and therefore no one — on either the buy side or the sell side — really had a clue where the public markets would end up valuing it.

Salmon's well-reasoned argument also represents the first time we've seen Goldman Sach used as a way to prove Wall Street's innocence.

The LinkedIn IPO debate
[Felix Salmon/Reuters]
Even The "Smart" Arguments Justifying LinkedIn's IPO Pop Are Bogus [Henry Blodget/BI]
Was LinkedIn Scammed? [Joe Nocera/NYT]