Investment Banking
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Introduction to Investment Banking
An investment bank is not a bank in the usual sense. It doesnt have checking or savings accounts, nor does it make auto or home loans. It is a bank in the general sense, in that it helps businesses, governments, and agencies to get financing from investors in a similar way that regular banks help these organizations get financing by lending money that the banks customers have deposited in the banks savings, checking, and money market accounts, and CDs. In other words, connecting the need for money with the source of money.Investment banks act as Intermediary between those needing funds (Corporations (domestic and foreign), government agencies, state and local governments, foreign governments) and those wanting to invest them (Corporations, governments, investment vehicles such as mutual funds, pension funds, endowments, etc.)
Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Until the late 1980s, the United States and Canada maintained a separation between investment banking and commercial banks.
A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.
Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is referred to as the “sell side.”
Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment constitutes the “buy side”. Many firms have buy and sell side components
Commercial banking vs. Investment banking
Investment Banking is RELATIONSHIP BANKING while commercial Banking is TRANSATION BANKING.
While regulation has changed the businesses in which commercial and investment banks may now participate, the core aspects of these different businesses remain intact. In other words, the difference between how a typical investment bank and a typical commercial operate bank is simple: A commercial bank takes deposits for checking and savings accounts from consumers while an investment bank does not.
Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world.
In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the division handling in an investment bank is often called the “Investment Banking Division” (IBD). However, only a few small firms solely provide this service. Almost all investment banks are heavily involved in providing additional financial services for clients, such as the trading of fixed income, foreign exchange, commodity, and equity securities. It is therefore acceptable to refer to both the “Investment Banking Division” and other front office divisions such as “Fixed Income” as part of “investment banking,” and any employee involved in either side as an “investment banker.” Furthermore, one who engages in these activities in-house at a non-investment bank is also considered an investment banker.
History of Investment Banking Industry
Investment banking began in the United States around the middle of the 19th century. Prior to this period, auctioneers and merchants—particularly those of Europe—provided the majority of the financial services. The mid-1800s were marked by the countrys greatest economic growth. To fund this growth, U.S. companies looked to Europe and U.S. banks became the intermediaries that secured capital from European investors for U.S. companies. Up until World War I, the United States was a debtor nation and U.S. investment bankers had to rely on European investment bankers and investors to share risk and underwrite U.S. securities.
From the mid-i800s to the early 1900s, J. P. Morgan was the most influential investment banker. Morgan could sell U.S. bonds overseas that the U.S. Department of the Treasury failed to sell and he led the financing of the railroad. He also raised funds for General Electric and United States Steel. Nevertheless, Morgans control and influence helped cause a number of stock panics, including the panic of 1901.
Morgan and other powerful investment bankers became the target of the muckrakers as well as of inquiries into stock speculations. These investigations included the Armstrong insurance investigation of 1905, the Hughes investigation of 1909, and the Money Trust investigation of 1912. The Money Trust investigation led to most states adopting the so-called blue-sky laws, which were designed to deter investment scams by start-up companies. The banks responded to these investigations and laws by establishing the Investment Bankers Association to ensure the prudent practices among investment banks. These investigations also led to the creation of the Federal Reserve System in 1913.
The stock market crashed on October 29, 1929, and commercial and investment banks lost $30 billion by mid-November. While the crash only affected bankers, brokers, and some investors and while most people still had their jobs, the crash brought about a credit crunch. Credit became so scarce that by 1931 more than 500 U.S. banks folded, as the Great Depression continued.
After exposing the corrupt practices of commercial and investment banks, the investigation led to the establishment of the Securities and Exchange Commission (SEC) as well as to the signing of the Banking Act of 1933, also known as the Glass-Steagall Act. The SEC became responsible for regulating and overseeing in-vesting in public companies. The Glass-Steagall Act mandated the separation of commercial and investment banking and from then—until the late 1980—banks had to choose between the two enterprises.
The Securities Act of 1933 and the Securities Exchange Act of 1934 required investment banks to make full disclosures of securities offerings in investment prospectuses and charged the SEC with reviewing them. This legislation also required companies to regularly file financial statements in order to make known changes