GOING DUTCH.(The Talk of the Town)

On January 17, 1956, the Ford Motor Company did what Henry Ford never wanted it to do: it went public. In the most highly anticipated initial public offering in history, investors shelled out more than six hundred million dollars for 10.2 million shares. The I.P.O. was more than a business transaction. It was a cultural event, the embodiment of what the New York Stock Exchange called "people's capitalism." Ford insisted on reserving roughly eighty per cent of the shares for individual investors--as opposed to big institutions--and when the market opened the company suddenly had three hundred and fifty thousand new owners.

Half a century later, another iconic company, the Internet search engine Google, is on the verge of going public, and the hype surrounding its I.P.O. has, if anything, surpassed that which preceded Ford's. Stock-market pundits predict that the offering could give Google a market value between fifteen and twenty-five billion dollars and resuscitate the I.P.O. market, and the real dreamers believe that it could return the entire technology sector to the "daddy's rich and mama's good-looking" days of the late nineties. Google's I.P.O. might indeed transform things--just not, as the dreamers hope, in Silicon Valley. What it really could change is Wall Street.

It's an open secret that the current I.P.O. system is broken. As things stand, when a company goes public the investment bank that is underwriting the offering effectively sets the price of the I.P.O., after canvassing big investors to find out how much they're willing to pay. Then it determines who gets to buy shares. In theory, the system is reasonable enough. In practice, it is deeply flawed, because it creates a conflict of interest between the investment bank and the company. The company wants to get the highest price possible for its stock so that it can raise as much money as possible. The bank has other priorities. It has personal relationships with institutional investors it wants to keep happy. It has clients to reward. If it keeps the offering price down, it can use the I.P.O. shares to curry favor and drum up new business. In the late nineties, for instance, institutional investors channelled trading through the investment banks that let them in on hot I.P.O.s. A recent New York Stock Exchange/N.A.S.D. report concluded that underwriters "had at times engaged in misconduct contrary to the best interests of investors and our markets; at least some of this misconduct was unlawful."

The victims of all the chicanery were the companies that went public. In 1999 and 2000, they saw their share prices jump by an average of sixty-five per cent on the first day of trading. Those gains went to the lucky investors who got cheap shares, rather than to the companies that were trying to raise money. The finance professors Jay Ritter and Ivo Welch have calculated that in those ...