You are on page 1of 16

The Role of Investment Banking

The Roles of The Investment Banks Staying apart from the activities of a commercial or retail bank to a large extent, an investment bank, as a financial institution , assists individuals, corporations and governments in raising capital by underwriting or acting as the clients agent in the issuance of securities. However extending its primary role of underwriting & distributing shares it plays some key roles in a market-based economy by bringing together entities in search of new capital and investors, usually institutional investors, providing ancillary services such as market making, trading ofderivatives, fixed income instruments, foreign exchange, commodities, and equity securities.
An investment bank basically undertakes two lines of business; one as the insider which might be termed as the sell side and the other as the outsider, sometimes coined as the buy side. Being in the sell side it trades securities either for cash or for other securities by facilitating transactions and making market. Underwriting and carrying research work for the promotion of securities are the other roles it performs as an insider. While in the buy- side it offers services to the investing public in order to maximize their return on investment by dealing with pension funds, mutual funds, hedge funds etc. Lots of investment bankers are to be found to be working in both two lines. This is how an Investment bank offers services to both corporations & investors helping the earlier in issuing securities and the later in buying them but maintaining the Chinese wall to prevent information from crossing, that is blocking the classified information of a company to be disclosed in public and vice versa. As far as the roles played by an investment bank are concerned, front office, & middle office have got their different shares with regards to the importance of the duties it performs. Front office role:

Capital raising
In an investment bank the Industry coverage group focuses on a specific industry, such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry and help them raise capital in several ways like Right Offerings, Public Offerings or Private Placements, among which a investing banker plays the most vital role in total IPO (initial public offering) process in the following ways: .

a. Underwriting: By underwriting an investment bank bears the risk of adverse price fluctuations during the period in which a new issue of securities is being distributed. By Firm Commitment Underwriting Agreements it shoulders on the total risk involved in the issuance while by the Best Efforts Agreement it undertakes to help sell at least a minimum amount of the issue with any unsold amounts returned to the issuing firm. Providing that the investment banker fails to sell the minimum quantity agreed upon, the whole issue is cancelled and reissued as soon as the market gets ready to accommodate them. b. Distribution: As Weston and Copeland (1989),points out, investment banks play a very crucial role in reaching the interest of the issuing firm to a large number of investors which help the respective firm grow faster. c. Advice and Counsel: This involves the investment banker contributing to the decision making concerning the ways, means & time of entrance into the capital market with an IPO. Whether its inputs will turn valuable or not, largely depend on six key factors as identified by Ellis (1989). They are:

1. 2. 3. 4. 5. 6.

Credibility earned over several years, with the senior management of the client company Understanding of need, financial goals & policies of the client company Ability to make useful recommendations to the company. Innovation of new financing techniques while improvising the older ones. Attaining specialisation in a specific service. Advising on a specific transaction.

However, standing antagonistically against the reputation of the investments banks some bankers shows a penchant for getting themselves involved in an unfair means of under pricing of initial public offerings , as evidenced & clarified in the article entitled , investment Banking, Reputation and Underpricing of Initial Public Offering, by Randolph p Beatty and Jr. Ritter. Financial Advice, Monitor & research The Product coverage group of a Investment Bank involves itself into mergers and acquisitions, leveraged finance, project finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt .It works with the collaboration of Industry group on the more intricate and specialized needs of a client initializing its monitor & research wing. The key role of this department is to give financial advice especially on mergers & acquisitions determining the following factors: a. Increasing the range of products b. Increasing the business size in geographical context.

complementing existing products

d. protecting the position in the market


raising profitability, and therefore the share price

f. Ensuring a wider range of investors. g. shifting the business towards sectors more favorably viewed by the market

Research & monitor is the wing which operates research work & census over different companies and writes reports about their prospects, goals & attainments often focusing on their buy or sale rate. Its resources help the bank give suggestions & determine the way its client should approach.

Middle office roles: Sales and trading: In broader sense investment bank's primary function is buying and selling products. In market making, traders will buy and sell financial products with the goal of making money on each

trade. In this regard an investment bankers primary role is to get to the investors to suggest trading ideas and take orders, ensuring them the maximum returns with the minimum risk.

Investment Management: For the benefit of its client an investment bank will professionally manage various securities like shares, bonds, etc. To meet specified investment goals. In this regard monitoring the market turns out to be very crucial in ensuring the possible gain from the fluctuations of the prices in the market.

Merchant banking Often termed as very personal banking , merchant banking is also a role played by an investment bank, offering capitals in exchange for share ownership. Defoe Fournier & Cie. , JPMorgan's One Equity Partners and the original J.P. Morgan & Co. are the current examples undertaking this role.

Management of the economic risks, credit risks, and operational risks; management of corporate treasury, tracking & analyzing the capital flows of the firm are the other roles that an investment banker is supposed to deal with.

Conclusion In discharging their duties & responsibilities the investment banks, though partake into a key role in economic mobilization, can not avoid conflicts over certain issues as: a. Many investment banks, as they own retail brokerages, have the chance of selling consumer securities as some banks did during 1990s, going against their stated risk profile. b. As investment banks engage themselves in trading for their own account they are likely to be tempted to benefit themselves by executing orders for their own account before filling orders previously submitted by their customers, providing that any changes in prices happen to take place induced by those orders.

Again without the regulation imposed on Investment Banks by Glass-Steagall, the business model of this kind of financial institute no longer works. The previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit which resulted in to the credit crisis in 2007. According to the previous guide line a company had to be in business for a minimum of five years and it had to show profitability for three consecutive years before going public through IPO. After deregulation, those standards were gone paving way to some corrupt bankers as well as some companies a chance to make money risking the capital loss of the investors of low graded companies while ushering in their own down fall. For instance Investment banks Bear Stearns, founded in 1923 and Lehman Brothers collapsed after 100 years of their operation. Another example is Merrill Lynch which had been in deep trouble and finally acquired by

Bank of America, Goldman Sachs and Morgan Stanley have also been fighting for their existence since the financial crisis took place in 2008.

Whatever the conflicts the investments banks raises in their operation, the role of them in the capital market is undeniable. In promoting the business of the larger companies by raising capitals, distributing shares or bonds; in handling the risk of the little investors by suggesting them on their trading along with managing their investments and above all in making a bridge between sellers & buyers of certain products available in the money market, the investment bankers have already proved themselves to be the indispensable part.

Investment Banking An investment bank is a financial institution which raises capital, trades securities, and manages corporate mergers and acquisitions. Another term used for investment banking is corporate finance. Investment banks work for companies and governments, and profit from them by raising money through the issuance and selling of securities in capital markets (both equity and debt) and insuring bonds (for example selling credit default swaps), and providing the necessary advice on transactions such as mergers and acquisitions. Most of investment banks provide strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, like the trading of derivatives, commodity, fixed income, foreign exchange, and equity securities. Investment banking is a form of banking which finances the capital requirements of enterprises. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and helps in carrying out mergers and acquisitions. An Investment Banker can be considered as a total solutions provider for any corporate, desirous of mobilizing its capital. The services provided range from investment research to investor service on the one hand and from preparation of the offer documents to legal compliances & post issue monitoring on the other. A long lasting relationship exists between the Issuer Company and the Investment Banker. Functions of Investment Banking: Investment banks carry out multilateral functions. Some of the most important functions of investment banking are as follows: Investment banking helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients. Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets Investment banking differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. They mainly specialize in bond trading, providing technical analysis or program trading as well as advising for mergers and acquisitions

Core activities of Investment Banking Investment banking: is the traditional aspect of investment banks that involves helping customers raise funds in the capital markets and advise them on mergers and acquisitions. Investment banking can also involve subscribing investors to a security issuance, negotiating with a merger target and coordinating with bidders. Sales and trading: Depending on the needs of the bank and its clients, the main function of a large investment bank is buying and selling products. In market making, the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Sales is the term that is used for the sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders Research: is the division of investment banks which reviews companies and makes reports about their prospects, often with "buy" or "sell" ratings. Although the research division generates no revenue, its resources can be used to assist traders in trading, can be used by the sales force in suggesting ideas to the customers, and by the investment bankers for covering their clients.

Investment bankers to follow uniform due diligence norms

The move is aimed at protecting investors and enhancing the quality of companies coming to the capital markets
BS Reporters / Mumbai Aug 08, 2012, 00:59 IST
Ads by Google

Google Business Website : Easily Create A Website In 15 Mins. Free From Google To Your Business! Under pressure from the regulator, the Association of Investment Bankers of India (AIBI), the industry body for investment bankers (i-bankers), has issued guidelines for its members to follow while conducting due diligence of companies planning to raise money through public issues. It has been a long-standing demand from experts to tighten norms governing investment bankers after several initial public offerings (IPOs) came under cloud since 2008. Nearly 80 per cent

IPOs out of the 173 that hit the market since 2008 are trading below their issue price, show data compiled by BS Research Bureau. Also, promoters and manipulators are under regulatory scanner for trying to siphon off money from the companies.


Some of the procedures listed in the manual that bankers will have to follow: Interviews with employees of the issuer company Site visits Background check of promoters Appointment of experts for carrying out checks and verifications Proper documentation of all the records Material disclosures to help take proper investment decisions

The move to have uniform due diligence norms is aimed at protecting investors and enhancing the quality of companies coming to the capital markets. This manual will establish a high and uniform standard of diligence across the industry and thereby enhance the credibility of the issuer and the investment banking community, said AIBI. The framework is designed to help investment bankers make meaningful disclosures while drafting offer documents. It will also be a reference point for officials of the Securities and Exchange Board of India (Sebi), while probing investment bankers. Proper disclosures will help investors take informed investment decisions. The due diligence manual prepared by AIBI lays emphasis on physical verification of documents, cross checks and also focuses on material evidence. For instance, merchant bankers are advised to make calls to employees of the issuer company, conduct background checks of promoters and check their profile with rating agency CIBIL. Madhu Prasad, vice-chairman of AIBI, said, This will ensure that merchant bankers follow a uniform set of rules while conducting due diligence. At present, due diligence procedure differs in every organisation. While Sebi's code of conduct seeks bankers to conduct due diligence of a company, it does not specify any criteria. In a due diligence process, a merchant banker collects material information about the issuer company and discloses it in the offer document. On several occasions, the due diligence data published in the prospectus of companies has been faulty and misleading investors. Thus, as a self-regulatory initiative, the AIBI has prescribed certain basic rules to be followed by bankers while conducting due diligence. However, observers doubt the success of this initiative as only 59 of the 170-odd Sebi registered merchant bankers are members of AIBI. Sebi chairman U K Sinha told Business Standard in an interview this week that the regulator will keep up the pressure on investment bankers. We are trying to put pressure on investment bankers and have asked them to be careful on pricing the IPOs, Sinha had said. The manual lays a lot of emphasis on verification of issuer company documents to ensure credibility.

AP News

Citigroup launches investment banking in China

Posted on August 07, 2012

NEW YORK (AP) Citigroup has launched investment banking operations in China via a joint venture.

The New York-based international bank said in a statement issued Monday in Shanghai that it had entered into a joint venture with the Orient Securities Co. Ltd. Primarily located in Shanghai, the joint venture will offer investment banking business, including debt and equity underwriting in China. Orient Securities has a 66.7 percent stake in the new entity, with the remaining 33.3 percent owned by Citigroup Global Markets Asia. The venture will have about 200 employees, the statement said. Citigroup shares rose 52 cents, or 1.8 percent, to $29.07 in afternoon trading Tuesday. They have traded in a 52-week range of $21.40 to $38.40.

Investment Bank
J.P. Morgan is a leading global investment bank with one of the largest client bases in the world. We serve nearly 20,000 clients, including corporations, governments, states, municipalities, healthcare organizations, education institutions, banks and investors. Our clients operate in more than 100 countries. We offer a complete range of financial services to help clients achieve their goals. We provide strategic advice, lend money, raise capital, help manage risk, and extend liquidity, and hold global leadership positions in all of our major business lines. Across our business, our goal is to help clients succeed, contribute to orderly and well functioning markets and support global economic growth. One of the most important functions we serve is extending credit to companies to help them grow. We were founded more than 200 years ago and have a proud history of, in the words of one of our founders, doing only first-class business in a first-class way.

Introduction to Investment Bank Services: Banking and Investment Services

Investment bankers function as intermediaries in financial transactions. They are experienced in carrying out projects that, for most companies, take place very rarely, but are critically important.

The role of the Investment Bank

Investment banks provide four primary types of services: raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories. Raising Capital An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants. Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialized investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors. Mergers and Acquisitions Investment banks often represent firms in mergers, acquisitions, and divestitures. Example projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the company, and assistance in identifying, structuring, and executing a merger or joint venture. In each case, the investment bank should provide a thorough analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Sales and Trading These services are primarily relevant only to publicly traded firms, or firms which plan to go public in the near future. Specific functions include making a market in a stock, placing new offerings, and publishing research reports. General Advisory Services:

Advisory services include assignments such as strategic planning, business valuations, assisting in financial restructurings, and providing an opinion as to the fairness of a proposed transaction.

Who needs an Investment Bank?

Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead.

What to look for in an Investment Bank

Investment banking is a service business, and the client should expect top-notch service from the investment banking firm. Generally only large client firms will get this type of service from the major Wall Street investment banks; companies with less than about $100 million in revenues are better served by smaller investment banks. Some criteria to consider include: Services Offered For all functions except sales and trading, the services should go well beyond simply making introductions, or "brokering" a transaction. For example, most projects will include detailed industry and financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors, assistance with due diligence, negotiating the terms of the transaction, coordinating legal, accounting, and other advisors, and generally assisting in all phases of the project to ensure successful completion. Experience It extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work with an investment bank that has some background in your specific industry segment. The investment bank should have a wide network of relevant contacts, such as potential investors or companies that could be approached for acquisition. Record of Success Although no reputable investment bank will guarantee success, the firm must have a demonstrated record of closing transactions.

Ability to Work Quickly Often, investment banking projects have very specific deadlines, for example when bidding on a company that is for sale. The investment bank must be willing and able to put the right people on the project and work diligently to meet critical deadlines. Fee Structure Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with the majority of the fee contingent upon successful completion of the transaction. It is important to utilize a fee structure that aligns the investment bank's incentive with your own. Ongoing Support Having worked on a transaction for your company, the investment bank will be intimately familiar with your business. After the transaction, a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis. Because investment banks are intermediaries, and generally not providers of capital, some executives elect to execute transactions without an investment bank in order to avoid the fees. However, an experienced, quality investment bank adds significant cant value to a transaction and can pay for its fee many times over. The investment banker has a vested interest in making sure the transaction closes, that the project is completed in an efficient time frame, and with terms that provide maximum value to the client. At the same time, the client is able to focus on running the business, rather than on the day-to-day details of the transaction, knowing that the transaction is being handled by individuals with experience in executing similar projects. Stephen Graham and Andrew Hamilton, Graham, Hamilton & Company, Inc. (202-296-1789)

Investment Banking


Investment Banking




HISTORY AND DEVELOPMENT OF INVESTMENT BANKING RECENT TRENDS IN INVESTMENT BANKING FURTHER READING: Investment banking involves raising money (capital) for companies and governments, usually by issuing securities. Securities or financial instruments include equity or ownership instruments such as stocks where investors own a share of the issuing concern and therefore are entitled to profits. They also include debt instruments such as bonds, where the issuing concern borrows money from investors and promises to repay it at a certain date with interest. Companies typically issue stock when they first go public through initial public offerings (IPOs), and they may issue stock and bonds periodically to fund such enterprises as research, new product development, and expansion. Companies seeking to go public must register with the Securities and Exchange Commission and pay registration fees, which cover accountant and lawyer expenses for the preparation of registration statements. A registration statement describes a company's business and its plans for using the money raised, and it includes a company's financial statements. Before stocks and bonds are issued, investment bankers perform due diligence examinations, which entail carefully evaluating a company's worth in terms of money and equipment (assets) and debt (liabilities). This examination requires the full disclosure of a company's strengths and weaknesses. The company pays the investment banker after the securities deal is completed and these fees often range from 3 to 7 percent of what a company raises, depending on the type of transaction. Investment banks aid companies and governments in selling securities as well as investors in purchasing securities, managing investments, and trading securities. Investment banks take the form of brokers or agents who purchase and sell securities for their clients; dealers or principals who buy and sell securities for their personal interest in turning a profit; and broker-dealers who do both. The primary service provided by investment banks is underwriting, which refers to guaranteeing a company a set price for the securities it plans to issue. If the securities fail to sell for the set price, the investment bank pays the company the difference. Therefore, investment banks must carefully determine the set price by considering the expectations of the company and the state of the market for the securities. In addition, investment banks provide a plethora of other services

including financial advising, acquisition advising, divestiture advising, buying and selling securities, interest-rate swapping, and debt-for-stock swapping. Nevertheless, most of the revenues of investment banks come from underwriting, selling securities, and setting up mergers and acquisitions. When companies need to raise large amounts of capital, a group of investment banks often participate, which are referred to as syndicates. Syndicates are hierarchically structured and the members of syndicates are grouped according to three functions: managing, underwriting, and selling. Managing banks sit at the top of the hierarchy, conduct due diligence examinations, and receive management fees from the companies. Underwriting banks receive fees for sharing the risk of securities offerings. Finally, selling banks function as brokers within the syndicate and sell the securities, receiving a fee for each share they sell. Nevertheless, managing and underwriting banks usually also sell securities. All major investment banks have a syndicate department, which concentrates on recruiting members for syndicates managed by their firms and responding to recruitments from other firms. A variety of legislation, mostly from the 1930s, governs investment banking. These laws require public companies to fully disclose information on their operations and financial position, and they mandate the separation of commercial and investment banking. The latter mandate, however, has been relaxed over the intervening years as commercial banks have entered the investment banking market.


Investment banking began in the United States around the middle of the 19th century. Prior to this period, auctioneers and merchantsarticularly those of Europerovided the majority of the financial services. The mid-1800s were marked by the country's 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. For example, investment bankers such as John Pierpont (J. P.) Morgan (1837-1913) of the United States would buy U.S. securities and resell them in London for a higher price. During this period, U.S. investment banks were linked to European banks. These connections included J.P. Morgan & Co. and George Peabody & Co. (based in London); Kidder, Peabody & Co. and Barling Brothers (based in London); and Kuhn, Loeb, & Co. and the Warburgs (based in Germany). Since European banks and investors could not assess businesses in the United States easily, they worked with their U.S. counterparts to monitor the success of their investments. U.S. investment bankers often would hold seats on the boards of the companies issuing the securities to supervise operations and make sure dividends were paid. Companies established long-term relationships with particular investment banks as a consequence. In addition, this period saw the development of two basic components of investment banking: underwriting and syndication. Because some of the companies seeking to sell securities during this period, such as railroad and utility companies, required substantial amounts of capital, investment bankers began under-writing the securities, thereby guaranteeing a specific price for them. If the shares failed to fetch the set price, the investments banks covered the difference. Underwriting allowed companies to raise the funds they needed by issuing a sufficient amount of shares without inundating the market so that the value of the shares dropped.

Because the value of the securities they underwrote frequently surpassed their financial limits, investment banks introduced syndication, which involved sharing risk with other investment banks. Further, syndication enabled investment banks to establish larger networks to distribute their shares and hence investment banks began to develop relationships with each other in the form of syndicates. The syndicate structure typically included three to five tiers, which handled varying degrees of shares and responsibilities. The structure is often thought of as a pyramid with a few large, influential investment banks at the apex and smaller banks below. In the first tier, the "originating broker" or "house of issue" (now referred to as the manager) investigated companies, determined how much capital would be raised, set the price and number of shares to be issued, and decided when the shares would be issued. The originating broker often handled the largest volume of shares and eventually began charging fees for its services. In the second tier, the purchase syndicate took a smaller number of shares, often at a slightly higher price such as I percent or 0.5 percent higher. In the third tier, the banking syndicate took an even smaller amount of shares at a price higher than that paid by the purchase syndicate. Depending on the size of the issue, other tiers could be added such as the "selling syndicate" and "selling group." Investment banks in these tiers of the syndicate would just sell shares, but would not agree to sell a specific amount. Hence, they functioned as brokers who bought and sold shares on commission from their customers. 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, Morgan's 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. Beginning about the time World War I broke out, the United States became a creditor nation and the roles of Europe and the United States switched to some extent. Companies in other countries now turned to the United States for investment banking. During the 1920s, the number and value of securities offerings increased when investment banks began raising money for a variety of emerging industries: automotive, aviation, and radio. Prior to World War 1, securities issues peaked at about $ 1 million, but afterwards issues of more than $20 million were frequent. The banks, however, became mired in speculation during this period as over 1 million investors bought stocks on margin, that is, with money borrowed from the banks. In addition, the large banks began speculating with the money of their depositors and commercial banks made forays into underwriting. 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. As a result, investment banking all but frittered away. Securities issues no longer took place for the most part and few people could afford to invest or would be willing to invest in the stock market, which kept sinking. Because of crash, the government launched an investigation led by Ferdinand Pecora, which became known as the Pecora Investigation. 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 thenntil the late 1980anks had to choose between the two enterprises. Further legislation grew out of this period, too. The Revenue Act of 1932 raised the tax on stocks and required taxes on bonds, which made the practice of raising prices in the different tiers of the syndicate system no longer feasible. 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 in their financial position. As a result of these acts, bidding for investment banking projects became competitive as companies began to select the lowest bidders and not rely on major traditional companies such as Morgan Stanley and Kuhn, Loeb. The last major effort to clean up the investment banking industry came with the U.S. v. Morgancase in 1953. This case was a government antitrust investigation into the practices of 17 of the top investment banks. The court, however, sided with the defendant investment banks, concluding that they had not conspired to monopolize the U.S. securities industry and to prevent new entrants beginning around 1915, as the government prosecutors argued. By the 1950s, investment banking began to pick up as the economy continued to prosper. This growth surpassed that of the 1920s. Consequently, major corporations sought new financing during this period. General Motors, for example, made a stock offering of $325 million in 1955, which was the largest stock offering to that time. In addition, airlines, shopping malls, and governments began raising money by selling securities around this time. During the 1960s, high-tech electronics companies spurred on investment banking. Companies such as Texas Instruments and Electronic Data Systems led the way in securities offerings. Established investment houses such as Morgan Stanley did not handle these issues; rather, Wall Street newcomers such as Charles Plohn & Co. did. The established houses, however, participated in the conglomeration trend of the 1950s and 1960s by helping consolidating companies negotiate deals. The stock market collapse of 1969 ushered in a new era of economic problems which continued through the 1970s, stifling banks and investment houses. The recession of the 1970s brought about a wave of mergers among investment brokers. Investment banks began to expand their services during this period, by setting up retail operations, expanding into international markets, investing in venture capital, and working with insurance companies. While investment bankers once worked for fixed commissions, they have been negotiating fees with investors since 1975, when the SEC opted to deregulate investment banker fees. This deregulation also gave rise to discount brokers, who undercut the prices of established firms. In addition, investment banks started to implement computer technology in the 1970s and 1980s in

order to automate and expedite operations. Furthermore, investment banking became much more competitive as investment bankers could no longer wait for clients to come to them, but had to endeavor to win new clients and retain old ones.


In the early 1980s, the SEC introduced and made law a rule that permits well-known companies to register securities without a set sale date and delay the sale of the securities until the issuers expect their securities will have strong prices in the market. These registrations are known as "shelf registrations and have become an important part of investment banking. Shelf financing also contributed to the decline of the historic connections between specific corporations and investment banks. Nevertheless, it did not change the basic structure of the industry, which has retained the pyramid shape. The apex investment houses before the introduction of shelf financing by and large remained the apex houses afterwards. Contemporary investment banking is also influenced by the growth of institutional investors as key players in the securities market. Whereas institutional investors accounted for 25 percent of securities trade in the 1960s, they accounted for over 75 percent in the 1990s. In addition, the securities market has become more global. For example, U.S. companies raised more money in London in the early 1980s than in New York. Moreover, U.S. investors are buying more European and Asian securities than in previous decades. New technologyncluding telecommunications technology, computers, and computer networksas enabled investment bankers to receive, process, organize, and circulate large amounts of diverse information. This technology has helped investment banks become more efficient and complete transactions more quickly. The increased competition within the investment banking arena has further quelled the establishment of long-term relationships between corporations and investment houses. Company executives receive offers from a variety of investment banks and they compare the offers, choosing the ones they believe will benefit their company the most. Large corporations generally have transactions with four or more investment banks. Nevertheless, corporations still favor their traditional investment banks and about 70 percent of the executives surveyed in a study said they do most of their business with their traditional investment banks, according to The Investment Banking Handbook. In the 1980s and 1990s, the investment banking industry continued to consolidate. As a result, a few investment banks with large amounts of capital dominated the industry and offered a wide array of services, earning the name "financial supermarkets." This trend also altered the structure of the industry, affecting the size and roles of syndicates. Syndicates became dependent on the type and volume of the securities being offered as a result. For small offerings, syndicates are usually small and the managing banks sell the majority of the securities. In contrast, for large offerings, the managing banks may create a syndicate including more than 100 investment banks. Investment houses continued to be innovative and introduce new financial instruments for both issuers and investors. Some of the most significant innovations include fixed-income and taxexempt securities, which have grown in popularity since their inception in the 1980s. Some key fixed-income securities have been debt warrants, which are bonds sold with warrants to buy more bonds at a specific time; and debt-equity swaps, where companies offer stock to existing bondholders.

With a growing number of mergers and acquisitions as well as corporate restructurings, investment banks have become increasingly involved in the process of arranging these transactions as part of their primary services. Because of changing economic, competitive, and market conditions, several thousand small and mid-sized companies as well as a handful of large corporations agree to merger and acquisition deals each year. Investment banks facilitate this process by providing advice on such transactions, negotiating on behalf of their clients, and guaranteeing the purchase of bonds for acquisitions that rely on debt, known as leveraged buyouts. The rapid expansion of the Internet in the mid-to-late 1990s provided an impetus for stockbrokers to begin offering trading services through the Internet. Because of the popularity of online trading, brokers began offering investment banking services. Early in 1999, E-Trade established the online investment bank "E-Offering," which provides online initial public offering services. Since the passage in 1933 of the Glass-Steagall Act, the U.S. banking industry has been closely regulated. This act requires the separation of commercial banking, investment banking, and insurance. In contrast to investment banks, commercial banks focus on taking deposits and lending. Nevertheless, there have been recent endeavors to repeal the act and to relax its measures. While the act has not been overturned even with efforts continuing in 1999, the Federal Reserve, which oversees commercial banking, has allowed commercial banks to sell insurance and issue securities. Consequently, investment banks and insurers support the latest round of activity to overturn the act. Japan and the United States are the only major industrial countries that require the separation of commercial and investment banking. SEE ALSO: Banks and Banking [Karl Heil]

"American Financial Regulation: Twelfth Time Lucky." Economist, 13 February 1999, 71. Benston, George J. The Separation of Commercial and Investment Banking. New York: Oxford University Press, 1990. Berss, Marcia. "Tough New Kid on the Block." Forbes, 2 October 1989, 42. Hoffman, Paul. The Deal Makers. Garden City, NY: Doubleday, 1984. "The Road to Investment Banking Is Long and Stony." Economist, 17 April 1999, 8. Taylor, Dennis. "E-Trade Move May Lead to Discount Investment Banking." Business Journal, 15 January 1999, 1. Williamson, J. Peter, ed. The Investment Banking Handbook. New York: Wiley, 1988.
Source: Encyclopedia of Business, 2000 Gale Cengage. All Rights Reserved. Full copyright.