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Investment banking pertains to certain activities of a
financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising
financial capital Financial capital (also simply known as capital or equity in finance, accounting and economics) is any Economic resources, economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their produ ...
by
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabil ...
or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of Company, companies, other business organizations, or their operating units are transferred to or Consolidation (business), consolidated with another company or b ...
(M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services ( fixed income instruments, currencies, and
commodities In economics, a commodity is an economic goods, good, usually a resource, that has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to who Production ...
) or research (macroeconomic, credit or equity research). Most investment banks maintain prime brokerage and
asset management Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...
departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses). Unlike commercial banks and retail banks, investment banks do not take deposits. From the passage of Glass–Steagall Act in 1933 until its repeal in 1999 by the Gramm–Leach–Bliley Act, the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
maintained a separation between investment banking and commercial banks. Other industrialized countries, including G7 countries, have historically not maintained such a separation. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (''Dodd–Frank Act of 2010''), the Volcker Rule asserts some institutional separation of investment banking services from commercial banking. All investment banking activity is classed as either "sell side" or "buy side". The " sell side" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.). The " buy side" involves the provision of advice to institutions that buy investment services.
Private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...
funds,
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
s,
life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurance , insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon ...
companies,
unit trust A unit trust is a form of Collective investment scheme, collective investment constituted under a Trust (law), trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a ...
s, and hedge funds are the most common types of buy-side entities. An investment bank can also be split into private and public functions with a screen separating the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas, such as stock analysis, deal with public information. An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.


History


Early history

The
Dutch East India Company The United East India Company ( nl, Verenigde Oostindische Compagnie, the VOC) was a chartered company established on the 20th March 1602 by the States General of the Netherlands amalgamating existing companies into the first joint-stock ...
was the first company to issue bonds and
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
to the general public. It was also the first publicly traded company, being the first company to be listed on an official
stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
.


Further developments

Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.e.
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically Underwriting, underwritten by one or mo ...
s (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range including securities research, proprietary trading, and
investment management Investment management is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of inv ...
. In the 21st century, the SEC filings of the major independent investment banks such as
Goldman Sachs Goldman Sachs () is an American multinational Investment banking, investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Wars ...
and
Morgan Stanley Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
reflect three product segments: # investment banking (mergers and acquisitions, advisory services, and securities underwriting), # asset management (sponsored investment funds), and # trading and principal investments (broker-dealer activities, including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)). In the United States, commercial banking and investment banking were separated by the Glass–Steagall Act, which was repealed in 1999. The repeal led to more " universal banks" offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions and hiring. Notable large banks with significant investment banks include JPMorgan Chase,
Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North ...
,
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
, Credit Suisse,
Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational Investment banking, investment bank and financial services company headquartered in Frankfurt, Frankfurt, Germany, and dual-listed on the Frankfurt Stock ...
, UBS, and
Barclays Barclays () is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services. Barclays traces ...
. After the financial crisis of 2007–08 and the subsequent passage of the ''Dodd-Frank Act of 2010'', regulations have limited certain investment banking operations, notably with the Volcker Rule's restrictions on proprietary trading. The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network.


Organizational structure


Core investment banking activities

Investment banking is split into front office, middle office, and back office activities. While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side investment firms such as boutique investment banks and small broker-dealers focus on investment banking and sales/trading/research, respectively. Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, an activity very important to an investment bank's reputation. Therefore, investment bankers play a very important role in issuing new security offerings.


Front office

''Front office'' is generally described as a
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
-generating role. There are two main areas within front office: investment banking and markets. * Investment banking involves advising organizations on mergers and acquisitions, as well as a wide array of capital raising strategies. * Markets is divided into "sales and trading" (including "structuring"), and "research".


=Corporate finance

= Corporate finance is the aspect of investment banks which involves helping customers raise funds in
capital market A capital market is a financial market in which long-term debt (over a year) or Equity (finance), equity-backed security (finance), securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital m ...
s and giving advice on
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of Company, companies, other business organizations, or their operating units are transferred to or Consolidation (business), consolidated with another company or b ...
(M&A); transactions in which capital is raised for the corporation include those listed aside.Shaun Beaney, Katerina Joannou and David Petri
What is Corporate Finance?
Corporate Finance Faculty, ICAEW, April 2005 (revised January 2011 and September 2020)
This work may involve, i.a., subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry—such as healthcare,
public finance Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achiev ...
(governments), FIG (financial institutions group), industrials, TMT (technology, media, and telecommunications), P&E (power & energy), consumer/retail, food & beverage, corporate defense and governance—and maintain relationships with corporations within the industry to bring in business for the bank. Product coverage groups focus on financial products—such as
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of Company, companies, other business organizations, or their operating units are transferred to or Consolidation (business), consolidated with another company or b ...
, leveraged finance, public finance, asset finance and leasing,
structured finance Structured finance is a sector of finance - specifically financial law - that manages Leverage (finance), leverage and Financial risk, risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of fin ...
, restructuring, equity, and debt issuance. Recent legal and regulatory developments in the U.S. will likely alter the makeup of the group of arrangers and financiers willing to arrange and provide financing for certain highly leveraged transactions.


=Sales and trading

= On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. ''Sales'' is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate
trading room A trading room gathers trader (finance), traders operating on financial markets. The trading room is also often called the Front office (finance), front office. The terms "dealing room" and "trading floor" are also used, the latter being inspir ...
s, which can price and execute trades, or structure new products that fit a specific need. Sales make deals tailored to their corporate customers' needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types. (In distinction, trades negotiated by market-makers usually bear standard terms; in market making, traders will buy and sell financial products with the goal of making money on each trade. See under trading desk.) ''Structuring'' has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities, so-called "yield enhancement". In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. ''Strategists'' advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Here, and in general, banks seek to maximize profitability for a given amount of risk on their balance sheet. Note here that the FRTB framework has underscored the distinction between the " Trading book" and the " Banking book" - i.e. assets intended for active trading, as opposed to assets expected to be held to maturity - and market risk capital requirements will differ accordingly. The necessity for numerical ability in sales and trading has created jobs for
physics Physics is the natural science that studies matter, its Elementary particle, fundamental constituents, its motion and behavior through Spacetime, space and time, and the related entities of energy and force. "Physical science is that depar ...
,
computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to Applied science, practical discipli ...
,
mathematics Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represented in modern mathematics ...
, and
engineering Engineering is the use of scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The discipline of engineering encompasses a broad range of more specializ ...
PhDs who act as "front office" quantitative analysts.


=Research

= The securities research division reviews companies and writes reports about their prospects, often with "buy", "hold", or "sell" ratings. Investment banks typically have sell-side analysts which cover various industries. Their sponsored funds or proprietary trading offices will also have buy-side research. Research also covers credit risk, fixed income, macroeconomics, and quantitative analysis, all of which are used internally and externally to advise clients; alongside "Equity", these may be separate "groups". The research group(s) typically provide a key service in terms of advisory and strategy. While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high-net-worth individuals) in the hopes that these clients will execute suggested trade ideas through the sales and trading division of the bank, and thereby generate revenue for the firm. With MiFID II requiring sell-side research teams in banks to charge for research, the business model for research is increasingly becoming revenue-generating. External rankings of researchers are becoming increasingly important, and banks have started the process of monetizing research publications, client interaction times, meetings with clients etc. There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can impact the performance of a security (in the secondary markets or an initial public offering) or influence the relationship between the banker and its corporate clients, and vice versa regarding material non-public information (MNPI), thereby affecting the bank's profitability.


Middle office

This area of the bank includes treasury management, internal controls (such as Risk), and internal corporate strategy. Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring; it is (co)responsible for the bank's funds transfer pricing (FTP) framework. Internal control tracks and analyzes the capital flows of the firm, the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses via dedicated trading desk product control teams. In the United States and United Kingdom, a
comptroller A comptroller (pronounced either the same as ''controller'' or as ) is a management-level position responsible for supervising the quality of accountancy, accounting and financial reporting of an organization. A financial comptroller is a senior- ...
(or financial controller) is a senior position, often reporting to the chief financial officer.


=Risk management

= Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades. Middle office "Credit Risk" focuses around capital markets activities, such as syndicated loans, bond issuance, restructuring, and leveraged finance. These are not considered "front office" as they tend not to be client-facing and rather 'control' banking functions from taking too much risk. "Market Risk" is the control function for the Markets' business and conducts review of sales and trading activities utilizing the VaR model. Other Middle office "Risk Groups" include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis. Front office risk teams, on the other hand, engage in revenue-generating activities involving debt structuring, restructuring, syndicated loans, and securitization for clients such as corporates, governments, and hedge funds. Here "Credit Risk Solutions", are a key part of capital market transactions, involving debt structuring, exit financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio hedging. The "Market Risk Team" provides services to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory. Well-known "Risk Groups" are at JPMorgan Chase, Morgan Stanley, Goldman Sachs and Barclays. J.P. Morgan IB Risk works with investment banking to execute transactions and advise investors, although its Finance & Operation risk groups focus on middle office functions involving internal, non-revenue generating, operational risk controls. The credit default swap, for instance, is a famous credit risk hedging solution for clients invented by J.P. Morgan's Blythe Masters during the 1990s. The Loan Risk Solutions group within Barclays' investment banking division and Risk Management and Financing group housed in Goldman Sach's securities division are client-driven franchises. Note, however, that risk management groups such as credit risk, operational risk, internal risk control, and legal risk are restrained to internal business functions — including firm balance-sheet risk analysis and assigning the trading cap — that are independent of client needs, even though these groups may be responsible for deal approval that directly affects capital market activities. Similarly, the ''Internal corporate strategy'' group, tackling firm management and profit strategy, unlike corporate strategy groups that advise clients, is non-revenue regenerating yet a key functional role within investment banks. This list is not a comprehensive summary of all middle-office functions within an investment bank, as specific desks within front and back offices may participate in internal functions.


Back office

The back office data-checks trades that have been conducted, ensuring that they are not wrong, and transacts the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank.


=Technology

= Every major investment bank has considerable amounts of in-house
software Software is a set of computer programs and associated software documentation, documentation and data (computing), data. This is in contrast to Computer hardware, hardware, from which the system is built and which actually performs the work. ...
, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex
algorithms In mathematics Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represen ...
for hedging purposes. Firms are responsible for compliance with local and foreign government regulations and internal regulations.


Other businesses

*Global transaction banking is the division that provides cash management, securities services (including custody and securities lending etc.) to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the bank run with Bear Stearns in 2008. *
Investment management Investment management is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of inv ...
is the professional management of various securities (
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s, bonds, etc.) and other assets (e.g.,
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
), to meet specified investment goals for the benefit of investors. Investors may be institutions ( insurance companies, pension funds,
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...
s etc.) or private investors (both directly via investment contracts and more commonly via investment funds e.g.,
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
s). The investment management division of an investment bank is generally divided into separate groups, often known as private wealth management and private client services. * Merchant banking can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy. Merchant banking is also a name used to describe the private equity side of a firm. Current examples include Defoe Fournier & Cie. and JPMorgan Chase's One Equity Partners. The original J.P. Morgan & Co., Rothschilds, Barings and Warburgs were all merchant banks. Originally, "merchant bank" was the British English term for an investment bank.


Industry profile

As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses). There are various
trade association A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by businesses that operate in a specific Industry (economics), industry. An industry tra ...
s throughout the world which represent the industry in
lobbying In politics, lobbying, persuasion or interest representation is the act of lawfully attempting to influence the actions, policies, or decisions of government officials, most often legislators or members of regulatory agency, regulatory agencie ...
, facilitate industry standards, and publish statistics. The International Council of Securities Associations (ICSA) is a global group of trade associations. In the United States, the Securities Industry and Financial Markets Association (SIFMA) is likely the most significant; however, several of the large investment banks are members of the American Bankers Association Securities Association (ABASA), while small investment banks are members of the National Investment Banking Association (NIBA). In Europe, the European Forum of Securities Associations was formed in 2007 by various European trade associations. Several European trade associations (principally the London Investment Banking Association and the European SIFMA affiliate) combined in November 2009 to form the Association for Financial Markets in Europe (AFME). In the securities industry in China, the Securities Association of China is a self-regulatory organization whose members are largely investment banks.


Global size and revenue mix

Global investment banking revenue increased for the fifth year running in 2007, to a record US$84 billion, which was up 22% on the previous year and more than double the level in 2003.International Financial Services London. (2010)
BANKING City Business Series
/ref> Subsequent to their exposure to United States sub-prime securities investments, many investment banks have experienced losses. As of late 2012, global revenues for investment banks were estimated at $240 billion, down about a third from 2009, as companies pursued less deals and traded less. Differences in total revenue are likely due to different ways of classifying investment banking revenue, such as subtracting proprietary trading revenue. In terms of total revenue, SEC filings of the major independent investment banks in the United States show that investment banking (defined as M&A advisory services and security underwriting) made up only about 15–20% of total revenue for these banks from 1996 to 2006, with the majority of revenue (60+% in some years) brought in by "trading" which includes brokerage commissions and proprietary trading; the proprietary trading is estimated to provide a significant portion of this revenue. The United States generated 46% of global revenue in 2009, down from 56% in 1999. Europe (with
Middle East The Middle East ( ar, الشرق الأوسط, ISO 233: ) is a geopolitical region commonly encompassing Arabian Peninsula, Arabia (including the Arabian Peninsula and Bahrain), Anatolia, Asia Minor (Asian part of Turkey except Hatay Pro ...
and
Africa Africa is the world's second-largest and second-most populous continent, after Asia in both cases. At about 30.3 million km2 (11.7 million square miles) including adjacent islands, it covers 6% of Earth's total surface area ...
) generated about a third while Asian countries generated the remaining 21%. The industry is heavily concentrated in a small number of major financial centers, including
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...
,
City of London The City of London is a City status in the United Kingdom, city, Ceremonial counties of England, ceremonial county and local government district that contains the historic centre and constitutes, alongside Canary Wharf, the primary central bu ...
,
Frankfurt Frankfurt, officially Frankfurt am Main (; Hessian dialects, Hessian: , "Franks, Frank ford (crossing), ford on the Main (river), Main"), is the most populous city in the States of Germany, German state of Hesse. Its 791,000 inhabitants as o ...
,
Hong Kong Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a List of cities in China, city and Special administrative regions of China, special ...
,
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country, island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Pen ...
, and
Tokyo Tokyo (; ja, 東京, , ), officially the Tokyo Metropolis ( ja, 東京都, label=none, ), is the capital and List of cities in Japan, largest city of Japan. Formerly known as Edo, its metropolitan area () is the most populous in the world, ...
. The majority of the world's largest Bulge Bracket investment banks and their investment managers are headquartered in New York and are also important participants in other financial centers. The city of London has historically served as a hub of European M&A activity, often facilitating the most capital movement and corporate restructuring in the area. Meanwhile, Asian cities are receiving a growing share of M&A activity. According to estimates published by the International Financial Services London, for the decade prior to the financial crisis in 2008, M&A was a primary source of investment banking revenue, often accounting for 40% of such revenue, but dropped during and after the financial crisis. Equity underwriting revenue ranged from 30% to 38%, and fixed-income underwriting accounted for the remaining revenue. Revenues have been affected by the introduction of new products with higher margins; however, these innovations are often copied quickly by competing banks, pushing down trading margins. For example, brokerages commissions for bond and equity trading is a commodity business, but structuring and trading derivatives have higher margins because each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. One growth area is private investment in public equity (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. Banks also earned revenue by securitizing debt, particularly mortgage debt prior to the financial crisis. Investment banks have become concerned that lenders are securitizing in-house, driving the investment banks to pursue vertical integration by becoming lenders, which is allowed in the United States since the repeal of the Glass–Steagall Act in 1999.


Top 10 banks

According to ''
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its The Wall Street Journal Asia, ...
'', in terms of total M&A advisory fees for the whole of 2020, the top ten investment banks were as listed in the table below. Many of these firms belong either to the Bulge Bracket (upper tier), Middle Market (mid-level businesses), or are elite boutique investment banks (independent investment banks). The above list is just a ranking of the advisory arm (M&A advisory, syndicated loans, equity capital markets, and
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The de ...
capital markets) of each bank and does not include the generally much larger portion of revenues from sales and trading and
asset management Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...
. Mergers and acquisitions and capital markets are also often covered by ''The Wall Street Journal'' and Bloomberg.


Financial crisis of 2007–2008

The financial crisis of 2007–2008 led to the collapse of several notable investment banks, such as the bankruptcy of
Lehman Brothers Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before Bankruptcy of Lehman Brothers, filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Gol ...
(one of the largest investment banks in the world) and the hurried sale of Merrill Lynch and the much smaller Bear Stearns to much larger banks, which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was bailed out by government taxpayer funded loans through the Troubled Asset Relief Program (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief. Similar situations occurred across the globe with countries rescuing their banking industry. Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets. Eventually, taxpayer assistance to banks reached nearly $13 trillion—most without much scrutiny— lending did not increase, and credit markets remained frozen. The crisis led to questioning of the business model of the investment bank without the regulation imposed on it by Glass–Steagall. Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the
Clinton administration Bill Clinton's tenure as the List of presidents of the United States, 42nd president of the United States began with First inauguration of Bill Clinton, his first inauguration on January 20, 1993, and ended on January 20, 2001. Clinton, a Democ ...
and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit. Matt Taibbi
"The Great American Bubble Machine"
''
Rolling Stone ''Rolling Stone'' is an American monthly magazine that focuses on music, politics, and popular culture. It was founded in San Francisco, San Francisco, California, in 1967 by Jann Wenner, and the music critic Ralph J. Gleason. It was first kno ...
'' magazine (5 April 2010). Retrieved 7 March 2011
Formerly, the guidelines said that in order to take a company public, it had to be in business for a minimum of five years and it had to show profitability for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the full impact of the change. A number of former Goldman Sachs top executives, such as Henry Paulson and Ed Liddy, were in high-level positions in government and oversaw the controversial taxpayer-funded bank bailout. The TARP Oversight Report released by the Congressional Oversight Panel found that the bailout tended to encourage risky behavior and "corrupt dthe fundamental tenets of a market economy". Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas banks, hedge funds, and pensions. The same year it received $10 billion in aid from the government, it also paid out multimillion-dollar bonuses; the total paid in bonuses was $4.82 billion. Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion in bonuses.


Criticisms

The investment banking industry, and many individual investment banks, have come under criticism for a variety of reasons, including perceived conflicts of interest, overly large pay packages, cartel-like or oligopolistic behavior, taking both sides in transactions, and more. Investment banking has also been criticised for its opacity.William D. Cohan, author of ''House of Cards: How Wall St. Bankers Broke Capitalism'', speaking on BBC Radio 5 Live, ''Up All Night'', 13 April 2011


Conflicts of interest

Conflicts of interest may arise between different parts of a bank, creating the potential for market manipulation, according to critics. Authorities that regulate investment banking, such as the
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(FCA) in the
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and the SEC in the
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, require that banks impose a "Chinese wall" to prevent communication between investment banking on one side and equity research and trading on the other. However, critics say such a barrier does not always exist in practice. Independent advisory firms that exclusively provide corporate finance advice argue that their advice is not conflicted, unlike bulge bracket banks. Conflicts of interest often arise in relation to investment banks' equity research units, which have long been part of the industry. A common practice is for equity analysts to initiate coverage of a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings for investment banking business. Alternatively, companies may threaten to divert investment banking business to competitors unless their stock was rated favorably. Laws were passed to criminalize such acts, and increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble after the
dot-com bubble The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Compos ...
. Philip Augar, author of ''The Greed Merchants'', said in an interview that, "You cannot simultaneously serve the interest of issuer clients and investing clients. And it’s not just underwriting and sales; investment banks run proprietary trading operations that are also making a profit out of these securities." Many investment banks also own retail brokerages. During the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable. Since investment banks engage heavily in trading for their own account, there is always the temptation for them to engage in some form of front running—the illegal practice whereby a broker executes orders for their own account before filling orders previously submitted by their customers, thereby benefiting from any changes in prices induced by those orders. Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained by ''New York Times Wall Street Business columnist Joe Nocera alleged that IPOs managed by Goldman Sachs and other investment bankers involved asking for kickbacks from their institutional clients who made large profits flipping IPOs which Goldman had intentionally undervalued. Depositions in the lawsuit alleged that clients willingly complied with these demands because they understood it was necessary in order to participate in future hot issues. ''
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'' Wall Street correspondent Felix Salmon retracted his earlier, more conciliatory statements on the subject and said he believed that the depositions show that companies going public and their initial consumer stockholders are both defrauded by this practice, which may be widespread throughout the IPO finance industry. The case is ongoing, and the allegations remain unproven.


Compensation

Investment banking is often criticized for the enormous pay packages awarded to those who work in the industry. According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their executives from 2003 to 2008, "while they presided over the packaging and sale of loans that helped bring down the investment-banking system".Tom Randall and Jamie McGee
"Wall Street Executives Made $3 Billion Before Crisis (Update1)"
Bloomberg, 26 September 2008.
The highly generous pay packages include $172 million for Merrill Lynch CEO Stanley O'Neal from 2003 to 2007, before it was bought by Bank of America in 2008, and $161 million for Bear Stearns' James Cayne before the bank collapsed and was sold to JPMorgan Chase in June 2008. Such pay arrangements have attracted the ire of Democrats and Republicans in the
United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
, who demanded limits on executive pay in 2008 when the U.S. government was bailing out the industry with a $700 billion financial rescue package. Writing in the Global Association of Risk Professionals journal, Aaron Brown, a vice president at Morgan Stanley, says "By any standard of human fairness, of course, investment bankers make obscene amounts of money."


See also

* Alternative investment * Boutique investment bank * Devolvement * Independent advisory firm * Investment Banking Exam * List of investment banks * Traditional investments


References


Further reading

*Fleuriet Michel Investment Banking Explained: An Insider's Guide to the Industry
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New York NY 2008 . * * * * * * {{DEFAULTSORT:Investment Banking Banking terms