MNGOP senate candidate Mike McFadden, challenging DFL incumbent Sen. Al Franken, is running on his business background as co-CEO of Lazard Middle Market. Since McFadden won’t even answer policy questions, I wonder if he’ll talk about how his parent company ripped off British taxpayers. When the British Conservative Party decided to privatize the Royal Mail, Lazard managed to sneak a huge chunk of the proceeds into its own pocket.
Conservatives of all western nations seem determined to privatize their postal services, not that it ever works, but there’s a chance to pillage for private gain, so can’t pass that up, and maybe Britain’s Conservative Party was feeling left out. So they decided to sell shares in the Royal Mail on the stock market, and they hired Lazard to advise on the pricing of the shares. They also asked some hedge funds to buy up a big bunch of shares and promise to hold them, thereby providing some price stability. One of those hedge funds was another branch of Lazard. Lazard promised not to flip the shares in exchange for buying at the initial price, but the shares nearly doubled in the first couple days (which means they were grossly underpriced)*, and if you can’t guess what happened next, you really need to work on your cynicism regarding big financial firms. Lazard flipped the shares, selling everything in the first couple days, not merely after promising not to, but after doing its best to get the government to underprice the shares.
Margaret Hodge, chair of the parliamentary public accounts committee (PAC), said Lazard “made a killing at the expense of the ordinary taxpayer that lost £750m on day one” of Royal Mail’s London Stock Exchange debut. [That’s roughly $1.5 billion]
An official report by the National Audit Office last month found that the government decided against increasing the flotation price of Royal Mail beyond 330p-a-share because of warnings from Lazard’s corporate advisory arm, Lazard & Co, that City funds would be put off.
On the day of the flotation, on 11 October, the shares rocketed 38% due to phenomenal demand from the City and public. They gained £750m in value in the biggest one-day rise in a privatisation since British Airways in 1987. The shares, which continued to rise to a peak of 615p, are now trading at 530p.
And get this:
During the sale Lazard & Co advised the government to sell the shares as cheaply as 212p. Other banks valued the shares as high as 510p, with none reckoning they were worth less than 300p.
That’s right, 330p wasn’t cheap enough for Lazard, even though whoever advised 510p was still a bit low. Lazard didn’t know their recommendation was nuts? Maybe they’re just that bad at advising on share prices? OK, incompetence happens. But then,
Lazard’s investment division, Lazard Asset Management, cashed in despite the advice from the business secretary, Vince Cable, that the postal service should “start its new life with a core of high-quality investors who would be there in good times and bad”.
William Rucker, chief executive of Lazard & Co, admitted at the PAC hearing on Wednesday that his part of the company knew that Lazard Asset Management was given “golden ticket” priority investor status, allowing its investment arm preferential access to the shares.
Hodge said she was astounded that Rucker knew that Lazard Asset Managment was on the list. He denied that there was anything improper in Lazard acting as adviser and investor. He said there were Chinese walls preventing one half of the business from knowing what the other half was doing.
Large financial firms like Lazard are supposed to have “Chinese walls” to avoid conflicts of interest. One unit might be advising you while another is promoting your competitor. One is encouraging investors to buy a stock while another unit it shorting that stock. In that last quote is an admission that one part of Lazard did indeed know what they other was doing. The part that trades stock knew the part that advises on stock offerings was pushing for too low a price. And Lazard made out like a bandit. The public was robbed of the proceeds it should have gotten for selling a valuable asset, so now they’ll get the cruddy mail service while Lazard gets the money. I imagine when Her Majesty learned what Her Majesty’s Government had just allowed to be done with Her Majesty’s Royal Mail, she pondered whether the chopping block in the Tower could be made workable again. Or did they privatize that too? Sorry, “privatise”.
What connection does Mike McFadden have? He’s co-CEO of a different unit, so we have to allow the possibility he didn’t know, or at least wasn’t involved in making decisions. There’s no direct evidence of his involvement, just one clear instance of one Lazard unit knowing what another unit was doing when it shouldn’t have. It would be nice if McFadden would address what he knew, but he won’t even answer rudimentary policy questions, so good luck getting answers on this. “Mr. McFadden, is rain bad during a picnic?” “Um, I need to get into office to get a feel for that issue before answering.” “What did you know about what these other Lazard units were doing?” “Hey! Mitt said rich guys weren’t supposed to be asked these questions!”
So when I say there’s no direct evidence, I haven’t found this scandal reported in the American press, and The Guardian hasn’t mentioned Mike McFadden at all. I doubt they even know a Lazard CEO is running for Senate in A Prairie Home Companion land. No, really, A Prairie Home Companion is broadcast over there and is the only reason they’ve heard of Minnesota. When I’d mention being from Minnesota, they always immediately mentioned Garrison Keillor.
I should have claimed to be him. It’s radio. They had no idea what he looked like. Maybe I could have gotten free stuff. Like shares in the Royal Mail that I could flip like McF … No, I shouldn’t say like McFadden since we don’t know he was involved. All we know for sure is he’s a high ranking executive in a company that does things like this.
But remember, he’s not Mitt Romney! True. Lazard is what Bain Capital hopes to be when it grows up.
*I’m putting this into an asteriskal paragraph because it’s a complete tangent, but I can imagine some readers asking this question and wondering if it doesn’t undercut the whole point. Isn’t it normal for the share prices of IPOs to soar on the first day of trading? No. You’re thinking of one aspect of the tech bubble, when investment banks had a great scam going. They would take any puny dot com public no matter how unready it was, and the shares would soar on the first day, often in the first minutes the stock was publicly traded. Since the point of the IPO is to raise money for the company selling shares, a soaring price suggests the shares were drastically underpriced, so the banks ripped off their clients by having them underprice their shares. Favored clients of the bank, and maybe the bank itself, would buy shares at the IPO price and flip them the first day for a big risk-free profit. Maybe the selling company thought it was worth it to have the financial press go on breathlessly about how this company was the most exciting thing ever, until the next soaring IPO next week. That scam ended with the tech bust, but even during the bubble, large companies that went public didn’t see much movement in their price the first day. So for something the size of the Royal Mail to soar meant something was drastically wrong.