Investment banking
Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities.
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.
[3][4] Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.e. initial public offerings (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.
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.
For corporations, investment bankers offer information on when and how to place their securities on the open market, a highly regulated process by the SEC to ensure transparency is provided to investors.
A pitch book, also called a confidential information memorandum (CIM), is a document that highlights the relevant financial information, past transaction experience, and background of the deal team to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client.
Sales desks then communicate their clients' orders to the appropriate bank department, which can price and execute trades, or structure new products that fit a specific need.
Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex financial 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.
The necessity for numerical ability in sales and trading has created jobs for physics, computer science, mathematics, and engineering PhDs who act as "front office" quantitative analysts.
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".
While the research division may or may not generate revenue (based on the specific compliance 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.
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 "Credit Risk" focuses around capital markets activities, such as syndicated loans, bond issuance, restructuring, and leveraged finance.
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.
[citation needed] Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support.
[32] 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.
[35] According to The Wall Street Journal, 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.
The entire financial services industry, including numerous investment banks, was bailed out by government taxpayer funded loans through the Troubled Asset Relief Program (TARP).
Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets.
[neutrality is disputed] Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton administration and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit.
[44] 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.
[51] However, the lack of transparency inherent to the investment banking industry is largely due to the necessity to abide by the non-disclosure agreement (NDA) signed with the client.
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 to develop relationships that lead to highly profitable investment banking business.
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.
[52] Reuters 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 cause for concern is that the investment banks advising on the IPOs have the incentive to serve institutional investors on the buy-side, creating a valid reason for a potential conflict of interest.
[54] The post-IPO spike in the stock price of newly listed companies has only worsened the problem, with one of the leading critics being high-profile venture capital (VC) investor, Bill Gurley.
[56] 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.
