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Chapter 10. How Investment Banks Inflate... > The Investment Banks and Institution...

The Investment Banks and Institutional Investors

When a mutual fund makes an order, it is supposed to be executed. However, with the bubble, traders for investment banks often found themselves calling a large mutual fund to warn them, “You're offering to pay too much for this stock in an IPO.” They couldn't do this for retail investors, as such calls skirted too closely to illegality by providing what might be construed as inside information. Plus, there were too many retail investors to call. Thus, because of their size, mutual funds received many more tips from the investment banks than did individual investors.

In New York at the time of the bubble, the ordinary allocation of shares in an IPO was about 75 percent to institutions, 25 percent to retail investors. The purpose was to give the company doing the IPO, the bank's client, the sort of investor base it wanted. In Internet deals, within a short time after a stock opened, the base shifted the other way—75 percent retail, or even more. The institutional buyers—like corporate pension plans and mutual funds (buying for their own accounts, not their funds)—were flipping the stock, selling to the retail investors, and making lots of money.


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