Investment banking

Investment banks assist corporations in raising funds in the public markets (both equity and debt), as well as provide strategic advisory services for mergers, acquisitions and other types of transactions. Over time, and especially the past decade, many investment banks have come to offer a wider range of services than just raising capital and advising large corporations.

Investment banks technically differ from Commercial Banks which serve to directly take deposits and make loans. In recent years, however, it has been increasingly common to see commerical banks and investment banks combined together, as banks have become more integrated. The Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act in 1999, in the United States, the Glass-Steagall Act prohibited banks from offering both commercial and investment services.

Investment banks also technically differ from brokerages, which are firms which assist people in choosing and buying stocks, bonds, and mutual funds. In many cases, brokerages and investment banks are integrated into single firms, and some brokerage companies also do investment banking and some investment banks also do some brokerage.

Role of Modern Investment Banks

The original purpose of investment banks was primarily raising capital and advising on mergers and acquisitions. As banking firms have diversified, investment banks have come to fill a variety of roles (list taken from the Swiss Banking Institute (pdf):

Underwriting and distributing new security issues
Offering brokerage services to public & institutional investors
Providing financial advice to corporate clients, especially on security issues, M&A deals
Providing financial security research to investors and corporate customers
Market-Making in particular securities

Investment banks have also moved into foreign currency exchanges, private banking, and providing bridge loans.

How Investment Banks Raise Money

A key role of investment banks is to advise companies in raising money. There are two types of fundraising investment bankers typically engage in: fundraising in capital markets and private placements.

Investment bankers can raise funds in capital markets in two ways. They can sell the company's equities in the stock market in an initial public offering (IPO) or secondary offering, or they can advise on debt issues to the public markets. These sales are tightly regulated by governing bodies such as the Securities and Exchange Commission in the United States, the largest such regulating body in the world.

Investment bankers also advise companies on private placements. These are the purchase or sale of corporate assets by private companies or individual. Types of private placement transactions include venture capital investments, strategic investments by companies, private equity investments, acquisitions, divestitures, merchant banking, and more.

Investment bankers create value for their clients through three primary means: They possess an extensive network of industry and financial contacts, they create a competitive environment for the company's securities, and they possess current knowledgeable about matters such as transaction structuring, legal processes, and comparable market events.

The main activities and units

Large, global investment banks typically have several business units, including Corporate Finance (concerned with managing the finances of corporations, including mergers, acquisitions and disposals), often called the Investment Banking Division of the firm; Research (concerned with investigating, valuing, and making recommendations to clients--both individual investors and larger entities such as hedge funds and mutual funds--regarding shares and corporate and government bonds); and Equities or Sales and Trading (concerned with buying and selling shares both on behalf of the bank's clients and sometimes also for the bank itself). Management of the bank's own capital, or Proprietary Trading, is often one of the biggest sources of profit; for example the banks may arbitrage in huge scale if they see a suitable opportunity and/or they may structure their books so that they profit from a fall of bond yields (a rise of bond prices).

Possible conflicts of interest

Because potential conflicts of interest may arise between different parts of a bank, the authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between Investment Banking on one side and Research and Equities on the other.

These are some of the conflicts of interest involved in investment banking:

Historically, most equity research firms are owned by investment banks. It is common practice for equity analysts to initiate coverage on a company in order to develop a relationship with that company that will lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. The practice went the other way as well: companies would threaten to divert investment banking business to competitors unless an analyst rated their stock favorably. No one is sure how widespread these criminal acts were. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market crash.

Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior allegedly occurred, much like with equity researchers, to clinch investment banking business or even to sell surplus shares during a public offering to keep public perception of the stock favorable. Such activity was promptly brought under scrutiny by the harsh eyes of the one Eliot Spitzer, and investment banks from this day on have relished their domination over the world and their ability to crush the competition. They are the biggest conspiracies of all time, making nothing but money, and feeding their fat faces from the trough of the poor. They create nothing. Watch the movie "Wall Street," it shows exactly how they live.

Investment banks

Some of the major global public and private investment banks include:

Role of Modern Investment Banks

How Investment Banks Raise Money

The main activities and units

Possible conflicts of interest

Investment banks

See also