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Investment Banking Outlook
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*OWFTUNFOU#BOLJOH1BTU
1SFTFOU BOE'VUVSF
CZ"MBO%.PSSJTPO 4BE#VTJOFTT4DIPPM 6OJWFSTJUZPG0YGPSEBOE
8JMMJBN+8JMIFMN +S .D*OUJSF4DIPPMPG$PNNFSDF 6OJWFSTJUZPG7JSHJOJB
NVESTMENT BANKS ARE CHANGING FAST &ORTY YEARS BE CREATED AND ENFORCED /VER THE PAST YEARS A SERIES
* AGO THE INDUSTRY WAS DOMINATED BY A FEW SMALL
PARTNERSHIPS THAT MADE THE BULK OF THEIR INCOME
FROM THE COMMISSIONS THEY EARNED m OATING
SECURITIES ON BEHALF OF THEIR CLIENTS 4ODAYS INVESTMENT
OF TECHNOLOGICAL ADVANCES HAS ALTERED THE ECONOMIC SITUA
TIONS THAT REQUIRE INFORMAL PROPERTY RIGHTS AND INVESTMENT
BANKS HAVE CHANGED THEIR FOCUS ACCORDINGLY 4HE IMMEDIATE
ANTECEDENTS OF THE MODERN INVESTMENT BANK CONCENTRATED
BANKS ARE HUGE FULL
SERVICE l RMS THAT MAKE A SUBSTANTIAL UPON THE COMMODITIES OF THE .ORTH !TLANTIC TRADE SINCE
PROPORTION OF THEIR REVENUES IN TECHNICAL TRADING BUSINESSES THE EARLY TH CENTURY HOWEVER THE CRITICAL ASSET HAS BEEN
THAT STARTED TO ATTAIN THEIR CURRENT PROMINENCE ONLY IN THE THE INFORMATION THAT UNDERPINS SECURITY MARKET TRADES
S 4HE #0)
ADJUSTED CAPITALIZATION OF THE TOP TEN INVEST
)N THIS ARTICLE WE OUTLINE OUR THEORY AND GO ON TO SHOW
MENT BANKS SOARED FROM BILLION IN TO BILLION HOW IT RELATES TO INVESTMENT BANKING HISTORY !S WE NOTE
IN "ETWEEN AND THE NUMBER OF PROFES
ABOVE AND DISCUSS IN GREATER DEPTH BELOW LARGE
SCALE CAPITAL
SIONALS EMPLOYED BY THE TOP l VE INVESTMENT BANKS RANKED ISM IS UNDERPINNED NOT ONLY BY CONTRACTS BETWEEN CAPITALISTS
BY CAPITALIZATION ROSE FROM TO AND THE BUSINESSES AND INDIVIDUALS IN WHICH THEY INVEST BUT
4HE ENORMOUS UPHEAVALS DOCUMENTED IN THE PREVIOUS ALSO BETWEEN THE SELLERS AND BUYERS OF VALUABLE INFORMATION
PARAGRAPH RAISE A NUMBER OF DIFl CULT QUESTIONS 7HAT HAVE )NVESTMENT BANKS HAVE ALWAYS BEEN LOCATED AT THE NEXUS OF
THE INVESTMENT BANKS OF TODAY GOT IN COMMON WITH THEIR THESE CONTRACTS AND THEIR POSITION HAS LEFT THEM PARTICULARLY
PREDECESSORS )S IT POSSIBLE TO DRAW ANY MEANINGFUL PARALLELS EXPOSED TO POLITICAL INTERFERENCE 7E SHOW HOW THE PROSPECT
BETWEEN BUSINESSES THAT TODAY CALL THEMSELVES INVESTMENT OF SUCH INTERFERENCE RELATES TO OUR THEORY AND WE POINT TO
BANKS AND THE INVESTMENT BANKS OF OR EVEN SOME RELEVANT TH
CENTURY EXAMPLES &INALLY WE DISCUSS
YEARS AGO 7HAT IS THE SOURCE OF THE RECENT CHANGES TO THE RECENT CHANGES TO THE INVESTMENT BANKING LANDSCAPE AND TRY
INVESTMENT BANKING LANDSCAPE AND CAN WE SAY ANYTHING TO IDENTIFY SOME OF THE TRENDS THAT WILL INm UENCE THE FUTURE
ABOUT THE LIKELY FUTURE DIRECTION OF THE INDUSTRY DEVELOPMENT OF THE INDUSTRY
4HESE QUESTIONS POINT TO A MORE FUNDAMENTAL ONE
NAMELY IF INVESTMENT BANKS DID NOT EXIST WOULD WE NEED *OWFTUNFOU#BOLJOHBOE1SPQFSUZ3JHIUT
TO INVENT THEM )N OTHER WORDS WHAT ARE INVESTMENT BANKS .INETEENTH
CENTURY SECURITY MARKETS WERE DOMINATED BY A
FOR ! SUFl CIENTLY GENERAL ANSWER TO THIS QUESTION SHOULD FEW SMALL PARTNERSHIP l RMS 4HE PRE
EMINENT PLAYERS IN THE
EXPLAIN THE PAST EVOLUTION OF THE INVESTMENT BANK SHED SOME l RST HALF OF THE CENTURY WERE THE 2OTHSCHILDS THE "ARINGS
LIGHT UPON INVESTMENT BANKING POLICY DEBATES AND HELP US AND THE "ROWNS !LL OF THESE l RMS HAD THEIR ORIGINS IN THE
TO UNDERSTAND THE FORCES CURRENTLY SHAPING THE INVESTMENT !TLANTIC TRADE OF THE TH CENTURY IMPORTING COMMODITIES
BANKING INDUSTRY AND THEIR LIKELY IMPACT THAT %UROPEAN AND PARTICULARLY %NGLISH MANUFACTURERS
3URPRISINGLY ALTHOUGH A WEALTH OF ACADEMIC AND POLICY REQUIRED AND EXPORTING THEIR l NISHED PRODUCTS
WORK ANALYZES SPECIl C LINES OF BUSINESS WITHIN INVESTMENT %NGLISH AND !MERICAN COMMERCIAL LAW IN THE TH
BANKS VERY LITTLE HAS BEEN WRITTEN TO EXPLAIN THE ECONOMIC CENTURY STILL LARGELY REm ECTED THE AGRARIAN AND HIERARCHICAL
PURPOSE OF THE INVESTMENT BANKING INSTITUTION )N A RECENT SOCIETIES FOR WHICH IT HAD BEEN DEVELOPED *URIES WERE FREE
BOOK WE ATTEMPT TO l LL THIS GAP 7E ARGUE THAT INVEST
TO MAKE RATHER ARBITRARY JUDGMENTS IN MERCANTILE DISPUTES
MENT BANKS HAVE TRADITIONALLY ADDED VALUE IN TRANSACTIONS AND MERCHANTS TENDED WHERE POSSIBLE TO RELY INSTEAD UPON
INVOLVING ASSETS OVER WHICH IT IS EXTREMELY HARD TO ESTABLISH PRIVATE ARBITRATION )T WAS PARTICULARLY HARD FOR CREDITORS TO
PROPERTY RIGHTS 3INCE THEIR INCEPTION INVESTMENT BANKS PURSUE THEIR DEBTORS THROUGH THE COURTS
HAVE FACILITATED COMPLEX DEALS BY CREATING A MARKETPLACE 4HE !TLANTIC TRADERS WHO OPERATED IN THIS ENVIRONMENT
IN WHICH INFORMAL PROPERTY RIGHTS OVER THESE ASSETS COULD WERE PIONEERS 4HEIR LEGAL DIFl CULTIES WERE COMPOUNDED BY
5IBUJT
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+S
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5IFEBUBJOUIJTQBSBHSBQIBSFUBLFOGSPNUIF4*"
UIF4FDVSJUJFT*OEVTUSZ%BUB UJPOT
1PMJUJDTBOE-BX
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+PVSOBMPG"QQMJFE$PSQPSBUF'JOBODFt7PMVNF/VNCFS ".PSHBO4UBOMFZ1VCMJDBUJPOt8JOUFS
THE FACT THAT THEY WERE DEALING IN MULTIPLE JURISDICTIONS !T (ENCE IN PURSUIT OF THEIR COMMODITY BUSINESS THE
THE SAME TIME IT WAS IMPOSSIBLE FOR A MERCHANT BASED IN LARGER !TLANTIC TRADERS DEVELOPED CLOSE RELATIONSHIPS AND
ONE COUNTRY TO EXERCISE CLOSE CONTROL OVER HIS OPERATIONS VALUABLE REPUTATIONS )N SO DOING THEY ACQUIRED A GREAT
IN ANOTHER TRANS
!TLANTIC COMMUNICATIONS TRAVELLED ONLY DEAL OF INFORMATION ABOUT THEIR COUNTERPARTIES AND ABOUT
AS QUICKLY AS THE SAILING BOATS THAT CONVEYED THEM )F THESE THE MARKETS IN WHICH THEY OPERATED )N A WORLD WHERE LOAN
MERCHANTS HAD HAD TO RELY UPON THE COURT
ENFORCED ARMS
AGREEMENTS WERE HARD TO ENFORCE IT WAS NATURAL THAT THEY
LENGTH CONTRACTS OF TODAYS ECONOMICS TEXT BOOKS THEY WOULD SHOULD USE THEIR RELATIONSHIPS AND THEIR SUPERIOR INFORMA
HAVE BEEN UNABLE TO OPERATE 4HEY THEREFORE HAD TO l ND ALTER
TION TO START TO LEND MONEY TO THEIR COUNTERPARTS !T THE END
NATIVE WAYS TO MAKE AND TO ENFORCE BINDING AGREEMENTS OF THE TH CENTURY MOST OF THE LARGER TRADERS WERE MAKING A
3O !TLANTIC TRADERS RELIED UPON EXTRA
LEGAL MODES OF HIGH PROPORTION OF THEIR PROl TS ADVANCING FUNDS TO COMMER
CONTRACTING AND CONTRACT ENFORCEMENT !CADEMIC ECONO
CIAL ENTERPRISES AND TRADING ON THE CURRENCY EXCHANGES
MISTS AND LAWYERS HAVE BECOME INCREASINGLY AWARE OF THE 4HE !TLANTIC TRADERS WHO BECAME l NANCIAL MARKET
IMPORTANCE TO ECONOMIC LIFE OF INSTITUTIONS THAT SUPPORT SPECIALISTS DID SO FOR SEVERAL REASONS !DVANCES IN THE THEORY
THIS TYPE OF ARRANGEMENT &OR EXAMPLE RECENT RESEARCH AND PRACTICE OF COMMERCIAL LAW DIMINISHED THE NEED FOR
HAS DEMONSTRATED THAT TRADING ARRANGEMENTS IN MEDIEVAL EXTRA
LEGAL CONTRACTING IN THE TRADE OF GOODS !T THE SAME
%UROPE WERE DESIGNED TO SUPPORT PRIVATE ENFORCEMENT AND TIME COMMUNICATIONS BETWEEN %UROPE AND !MERICA
MANY TRADE AGREEMENTS IN THE MODERN DIAMOND AND COTTON IMPROVED IN THE EARLY TH CENTURY THEREBY UNDERMINING
INDUSTRIES ARE ALSO MADE OUTSIDE THE FORMAL LEGAL SYSTEM SOME OF THE INFORMATIONAL ADVANTAGES OF CLOSE RELATIONSHIPS
4HE INSTITUTIONS THAT SUPPORT SUCH hPRIVATEv LAW
MAKING AND NETWORKS !TLANTIC TRADERS AIMING TO USE THEIR REPUTA
HAVE A NUMBER OF FEATURES IN COMMON )N PARTICULAR ALL TIONS AND RELATIONSHIPS TO GENERATE PROl TS WERE THEREFORE
ARE BASED UPON CLOSE LONG
TERM RELATIONSHIPS BETWEEN THE FORCED TO SEARCH FOR ALTERNATIVE MARKETS 4HESE MARKETS
PARTIES INVOLVED 4HESE RELATIONSHIPS FOSTER TRUST AND MORE WERE l NANCIAL
IMPORTANTLY THEY ENSURE THAT COOPERATION IS IN THE BEST INTER
)NDUSTRIAL ADVANCES AND THE TH
CENTURY EXPANSION OF
ESTS OF THE COUNTERPARTIES TO A TRADE ! COUNTERPARTY WHO STATE EXPENDITURE BOTH CREATED A NEED FOR LARGE
SCALE l NANCE
RENEGES UPON AN EXTRA
LEGAL AGREEMENT WILL NOT BE PURSUED -ODERN CORPORATE l NANCE TEACHES US THAT INFORMATION IS OF
THROUGH THE COURTS BUT HE WILL IMPAIR THE RELATIONSHIP UPON CRITICAL IMPORTANCE WHEN A COMPANY RAISES CAPITAL CAPITAL
WHICH THE AGREEMENT RESTS )N RELATIONSHIPS THAT ARE BOTH ISTS WILL BE PREPARED TO INVEST IN A NEW VENTURE ONLY IF THEY
LONG
TERM AND PROl TABLE THE SHORT
TERM PROl TS FROM CHEAT
HAVE SUFl CIENT KNOWLEDGE OF ITS COMMERCIAL POTENTIAL AND
ING ARE INSUFl CIENT TO COMPENSATE FOR THE DAMAGE CAUSED OF THE ABILITY AND INTEGRITY OF THE ENTREPRENEURS MANAGING
TO THE RELATIONSHIP AND PRIVATE AGREEMENTS ARE HONORED IT )NFORMATIONAL ASSETS
ASSETS ARE THEREFORE ESSENTIAL TO THE DEVEL
&OR EXAMPLE ALTHOUGH SHORT SALES OF SECURITIES WERE LEGALLY OPMENT OF IMPORTANT INNOVATIONS (OWEVER WHILE ASSETS
UNENFORCEABLE WHEN THE .EW 9ORK 3TOCK %XCHANGE WAS LIKE LAND IRON ORE AND COMPUTERS CAN BE BOUGHT AND SOLD
FOUNDED THE %XCHANGE USED THE THREAT OF EXCLUSION TO IN A TEXTBOOK MARKETPLACE INFORMATIONAL ASSETS CANNOT
ENSURE THAT ITS MEMBERS HONORED THESE CONTRACTS )T IS PROBABLY IMPOSSIBLE TO PROVE IN COURT THAT A PARTICU
'IVEN THE IMPOSSIBILITY OF RELYING UPON THE FORMAL LAR PERSON GENERATED THE INFORMATION THAT UNDERPINNED A
hBLACK LETTERv LAW TH
CENTURY !TLANTIC TRADERS WERE FORCED TRANSACTION IT IS LIKEWISE IMPOSSIBLE TO PREVENT THAT PERSON
TO RELY UPON PRIVATE AGREEMENTS THAT WERE SUSTAINED THROUGH FROM SELLING THE INFORMATION SEVERAL TIMES AND SO REDUCING
LONG
TERM PROl TABLE DEALING (ENCE A COTTON GROWER WHO ITS VALUE TO ANY OF THE PURCHASERS !ND WITHOUT AN ARENA IN
RELIED UPON HIS RELATIONSHIP WITH A MERCHANT TO TRANSPORT WHICH HE CAN SELL HIS INFORMATIONAL ASSETS NO INVESTOR WILL
AND TO SELL HIS GOODS COULD BE TRUSTED HONESTLY TO REPORT THE BE PREPARED TO CREATE THEM
QUALITY OF HIS MERCHANDISE TO THE MERCHANT EVEN THOUGH )N THE ABSENCE OF FORMAL LAWS GOVERNING THE EXCHANGE
THERE WERE FEW FORMAL LEGAL PENALTIES FOR MISREPRESENTATION OF PRICE
RELEVANT INFORMATIONAL ASSETS IT IS NECESSARY TO FALL
!T THE SAME TIME THE MERCHANTS TO WHOM HE SOLD HIS GOODS BACK UPON THE TYPE OF PRIVATE SELF
ENFORCING LAWS THAT WE
RESISTED THE TEMPTATION TO RIP HIM OFF BECAUSE OF THE EFFECT DESCRIBED ABOVE )T WAS THEREFORE NATURAL THAT MANY !TLANTIC
THE ENSUING REPUTATIONAL DAMAGE WOULD HAVE HAD UPON THEIR TRADERS SHOULD RESPOND TO INCREASING TH
CENTURY DEMANDS
DEALING WITH HIM AND WITH OTHER MERCHANTS UPON !MERICA AND %UROPES DISPERSED INVESTORS BY DEPLOYING
13.JMHSPN %$/PSUIBOE#38FJOHBTU
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&DPOPNJDTBOE1PMJUJDT "(SFJG 1.JMHSPN BOE#38FJOHBTU
i$PPS $PNNFSDJBM-BXJOUIF$PUUPO*OEVTUSZ$SFBUJOH$PPQFSBUJPOUISPVHI3VMFT /PSNTBOE
EJOBUJPO $PNNJUNFOUBOE&OGPSDFNFOU5IF$BTFPGUIF.FSDIBOU(VJME w+PVSOBMPG *OTUJUVUJPOT w.JDIJHBO-BX3FWJFX
1PMJUJDBM&DPOPNZ "(SFJG
i$POUSBDU&OGPSDFBCJMJUZBOE&DPOPNJD 5IF /:4&T FBSMZ SPMF BT B QSJWBUF MBXNBLJOH CPEZ JT EFTDSJCFE CZ 4 #BOOFS
*OTUJUVUJPOTJO&BSMZ5SBEF5IF.BHISJCJ5SBEFST$PBMJUJPO w"NFSJDBO&DPOPNJD3FWJFX
"OHMP"NFSJDBO 4FDVSJUJFT 3FHVMBUJPO $VMUVSBM BOE 1PMJUJDBM 3PPUT
$BNCSJEHF 6,$BNCSJEHF6OJWFSTJUZ1SFTT
+PVSOBMPG"QQMJFE$PSQPSBUF'JOBODFt7PMVNF/VNCFS ".PSHBO4UBOMFZ1VCMJDBUJPOt8JOUFS
'JHVSF 5IF*OWFTUNFOU#BOLT*OGPSNBUJPO.BSLFUQMBDF EVERY TIME IT PRICED A NEW ISSUE IT HAD LITTLE INCENTIVE TO
MISREPRESENT THE INFORMATION IT ACQUIRED
!LTHOUGH THE EARLIEST INVESTMENT BANKS OPERATED IN A
'SFRVFOUUSBEFST
VERY DIFFERENT TECHNOLOGICAL LEGAL AND POLITICAL ENVIRON
t#JMBUFSBMSFQVUBUJPOT
t&YDMVEBCMF
MENT THE MECHANISMS JUST DESCRIBED ARE VERY CLOSE TO THOSE
THAT UNDERPIN MODERN SECURITY OFFERINGS )N BOTH CASES
INVESTMENT BANKS LEVER OFF THEIR RELATIONSHIPS TO PROVIDE
INCENTIVES FOR INFORMATION PRODUCTION AND DISSEMINATION
*OGPSNBUJPO -BSHF
1SPEVDFST *OWFTUPST
AND THEY ARE TRUSTED BECAUSE THEY RISK THEIR REPUTATIONAL
4FMMFSTPG 4FMMFSTPG CAPITAL EVERY TIME THEY UNDERWRITE A FRESH DEAL
JOGPSNBUJPO MJRVJEJUZ )N SHORT WE ARGUE IN OUR BOOK THAT l NANCIAL MARKETS
CANNOT FUNCTION EFFECTIVELY IF AGENTS WITH VALUABLE INFOR
4FDPOEBSZ.BSLFU
MATION ARE UNABLE TO SELL IT TO THOSE WHO REQUIRE IT 4HIS
*OGPSNBUJPO -JRVJEJUZ PROBLEM IS PARTICULARLY ACUTE WHEN NEW SECURITIES ARE ISSUED
#VZFSTPGMJRVJEJUZ
/FUXPSL /FUXPSL
"HHSFHBUFEFNBOEJOGP BUT IT IS ALSO IMPORTANT AT OTHER TIMESWHEN ONE l RM
*OWFTUNFOU#BOL #VZFSTPGNBSLFU PURCHASES ANOTHER FOR EXAMPLE OR WHEN LOANS TO DISTRESSED
FYQFSUJTF CORPORATIONS HAVE TO BE RENEGOTIATED )NVESTMENT BANKS
ADD VALUE IN THESE SITUATIONS BY DESIGNING AN ENVIRONMENT
'SFRVFOUBOE WITHIN WHICH INFORMATION WILL BE PRODUCED ENFORCING THE
JOGSFRVFOUUSBEFST PRIVATE LAWS THAT GOVERN ITS EXCHANGE AND ACTING AS INTER
3FUBJM*OWFTUPST
4VQQMZTPNF
t1VCMJDBOEQSJWBUF MEDIARIES BETWEEN THE INVESTORS AND ANALYSTS WHO SELL THIS
*TTVFST SFQVUBUJPO
#VZFSTPG MJRVJEJUZ INFORMATION AND THE INVESTORS AND CORPORATE SECURITY ISSUERS
t.PSFWFSJGJBCMF
JOGPSNBUJPO "HHSFHBUFEFNBOE
RVBMJUZJOGPSNBUJPO
WHO PURCHASE IT (ENCE WE ARGUE THAT INVESTMENT BANKS EXIST
JOGPSNBUJPO BECAUSE THEY MAINTAIN AN INFORMATION MARKETPLACE THAT FACILI
"MTPGSFFSJEF
TATES INFORMATION
SENSITIVE SECURITY TRANSACTIONS
4HIS DISCUSSION SUGGESTS A WAY OF THINKING ABOUT CHANGE
*OGSFRVFOUUSBEFST *OGSFRVFOUUSBEFST IN THE INVESTMENT BANKING MARKET 4ECHNOLOGICAL LEGAL AND
t3FMJBODFVQPO t3FMJBODFVQPOQVCMJD POLITICAL CHANGES MAY ALTER THE TYPE OF CONTRACTS THAT CAN
QVCMJDSFQVUBUJPO SFQVUBUJPO
BE WRITTEN AND THEY MAY EQUALLY AFFECT THE MARKETS WHERE
t&YDMVEBCMF t-JNJUFEFYDMVEBCJMJUZ
JONBOZKVSJTEJDUJPOT
SUBSTITUTES FOR FORMAL CONTRACTS ARE MOST NEEDED ,IKE EVERY
OTHER BUSINESS INVESTMENT BANKS FOLLOW THE MONEY AND
THEY WILL ALTER THEIR OPERATIONS AND THEIR BUSINESS LINES IN
RESPONSE TO THIS TYPE OF CHANGE 7E WILL LATER USE THIS OBSER
THEIR RELATIONSHIPS AND THEIR INFORMATION
GATHERING ABILITIES VATION TO ANALYZE CURRENT TRENDS IN INVESTMENT BANKING
TO CREATE PRIVATE INFORMATIONAL MARKETPLACES "Y THE MIDDLE "UT l RST WE EXAMINE THE WAYS IN WHICH INVESTMENT BANKS
OF THE CENTURY MANY OF THE SO
CALLED hMERCHANT BANKERSv MANAGE AND HAVE MANAGED THEIR INFORMATION NETWORKS
HAD DECIDED TO BECOME SPECIALIST l NANCIERS
4HE FUND
RAISING OPERATIONS OF THE NASCENT INVESTMENT 3FMBUJPOTIJQT
3FQVUBUJPOT
BOE4LJMMT
BANKS WERE REMARKABLY SIMILAR TO THOSE OF TODAY 4HEN AS JO*OWFTUNFOU#BOLJOH
NOW POTENTIAL INVESTORS IN NEW SECURITIES ISSUES REQUIRED 7E HAVE ALREADY NOTED THAT INVESTMENT BANKS USE THE THREAT
REASSURANCE THAT THE ISSUES WERE OF HIGH QUALITY AND THAT OF EXCLUSION FROM A VALUABLE LONG
TERM RELATIONSHIP TO ENSURE
THEY WERE FAIRLY PRICED %VEN IF THEY COULD NOT ESTABLISH THIS THAT LEGALLY UNENFORCEABLE AGREEMENTS ARE HONORED 4HEIR
FOR THEMSELVES THE INVESTMENT BANKS USUALLY KNEW SOMEONE RELATIONSHIPS ARE THEREFORE CENTRAL TO THEIR MISSION OF CREAT
WHO COULD &ORMAL CONTRACTS OVER THIS INFORMATION WERE ING AND DISSEMINATING PRICE
RELEVANT INFORMATION IN
IMPOSSIBLE SO INVESTMENT BANKS USED THE THREAT OF EXCLU
SITUATIONS WHERE AS IN AN INITIAL PUBLIC OFFERING ARMS
SION FROM VALUABLE LONG
TERM RELATIONSHIPS TO PROVIDE THEIR LENGTH MARKETS CANNOT PROVIDE THE NECESSARY INCENTIVES )N
CONTACTS WITH INCENTIVES TO PRODUCE AND TO REVEAL INFORMA
THIS SECTION WE ASK WHICH RELATIONSHIPS ARE IMPORTANT TO
TION !ND BECAUSE THE INVESTMENT BANK RISKED ITS REPUTATION INVESTMENT BANKS AND HOW THEY ARE MAINTAINED
8FTVSWFZUIFSFMBUFEMJUFSBUVSFJOEFUBJMJODIBQUFSUISFFPGPVSCPPL'PSBCSJFG TVFT w+PVSOBMPG'JOBODJBM&DPOPNJDT -.#FOWFOJTUF 8:#VTBCBBOE
SFWJFXPGUIFMJUFSBUVSF TFF-.#FOWFOJTUFBOE8+8JMIFMN
i*OJUJBM1VCMJD 8+8JMIFMN
i*OGPSNBUJPO&YUFSOBMJUJFTBOEUIF3PMFPG6OEFSXSJUFSTJO1SJNBSZ
0GGFSJOHT(PJOHCZUIF#PPL w+PVSOBMPG"QQMJFE$PSQPSBUF'JOBODF'PSGPSNBMEFWFM &RVJUZ.BSLFUT w+PVSOBMPG'JOBODJBM*OUFSNFEJBUJPO "&4IFSNBOBOE4
PQNFOUPGUIFJEFBTJOUIJTBSUJDMF TFFJOQBSUJDVMBS-.#FOWFOJTUFBOE1"4QJOEU 5JUNBO
i#VJMEJOHUIF*100SEFS#PPL6OEFSQSJDJOHBOE1BSUJDJQBUJPO-JNJUTXJUI
i)PX*OWFTUNFOU#BOLFST%FUFSNJOFUIF0GGFS1SJDFBOE"MMPDBUJPOPG/FX*T $PTUMZ*OGPSNBUJPO w+PVSOBMPG'JOBODJBM&DPOPNJDT
+PVSOBMPG"QQMJFE$PSQPSBUF'JOBODFt7PMVNF/VNCFS ".PSHBO4UBOMFZ1VCMJDBUJPOt8JOUFS
&IGURE WHICH IS TAKEN FROM OUR BOOK ILLUSTRATES THE OUR BOOK THAT ONE EXPLANATION FOR INVESTMENT BANK SYNDI
INVESTMENT BANKS RELATIONSHIPS AND ITS POSITION AT THE CATES IS THAT THEY COMBINE INFORMATION NETWORKS AND HENCE
CENTER OF THE INFORMATION MARKETPLACE )NVESTMENT BANKS FORCE THEM TO INTERNALIZE THE EFFECTS OF THE LEAKS THAT MAY BE
NEED RELATIONSHIPS WITH COUNTERPARTIES WHO CAN PRICE INEVITABLE IN LARGE TRANSACTIONS
THEIR ISSUES AND WHO CAN PROVIDE SUFl CIENT LIQUIDITY FOR
THE BANK TO BE SURE THAT IT WILL PLACE ITS ISSUES 7E REFER TO 5IF1PXFSPG/FUXPSLT
THESE COUNTERPARTIES AS THE BANKS INFORMATION NETWORK AND
INFORMATION NETWORK
INFORMATION NETWORK AND )NVESTMENT BANKS MAINTAIN NETWORKS OF FREQUENT TRADERS
LIQUIDITY NETWORK RESPECTIVELY !S ILLUSTRATED IN THE l GURE WHO PROVIDE THEM WITH THE INFORMATION AND THE LIQUIDITY
SOME MEMBERS OF THE LIQUIDITY NETWORK MAY ALSO PRODUCE NECESSARY TO m OAT NEW SECURITIES #AREFUL ATTENTION TO THE
PRICE
RELEVANT INFORMATION COMPOSITION OF THESE NETWORKS ENSURES THAT THEIR MEMBERS
3OME BANKS MAINTAIN A LARGE RETAIL INVESTOR NETWORK HAVE THE RIGHT INCENTIVES !T THE SAME TIME INVESTMENT
2ETAIL INVESTORS PROVIDE AN ALTERNATIVE SOURCE OF LIQUIDITY BANKS INm UENCE THE BEHAVIOR OF THEIR NETWORK MEMBERS BY
AND ALTHOUGH INDIVIDUALLY THEY NEED NOT BE WELL
INFORMED INVESTING DIRECTLY IN INFORMATION PRODUCTION -OST INVEST
ABOUT THE VALUE OF A NEW ISSUE THEIR AGGREGATE DEMAND MENT BANKS MANAGE LARGE RESEARCH DEPARTMENTS WORKING ON
INFORMATION CAN BE VALUABLE TO THE BANK THAT ACQUIRES IT PROBLEMS SIMILAR TO THOSE FACED BY THE NETWORK MEMBERS
"ANKS ALSO HAVE A PRESENCE IN THE SECONDARY MARKET 4HESE DEPARTMENTS PROVIDE THE BANK WITH A BARGAINING CHIP
WHICH IS VALUABLE FOR SEVERAL REASONS &IRST IT PROVIDES IN ITS NEGOTIATIONS WITH NETWORK MEMBERS ALTHOUGH THEY
PRIMARY MARKET INVESTORS WITH AN EXIT ROUTE AND HENCE SEEM HARD TO JUSTIFY ON A STAND
ALONE BASIS
LOWERS THE COSTS OF THE LIQUIDITY NETWORK 3ECOND IT IS A /F COURSE CONTRACTING PROBLEMS WITHIN THE INFORMA
SOURCE OF INFORMATION ABOUT MARKET SENTIMENT WHICH ASSISTS TION NETWORK ARE TWO
FOLD THE BANK MUST BE CONl DENT OF
WITH THE BANKS PRIMARY MARKET WORK 4HIRD BY PUTTING THE INFORMATION THAT ITS NETWORK MEMBERS SUPPLY BUT THE
THEIR CAPITAL TO WORK IN THE SECONDARY MARKETS INVESTMENT RELATIONSHIP WILL NOT WORK UNLESS THE BANKS COUNTERPARTIES
BANKS CAN EARN AN ADDITIONAL RETURN ON THEIR INFORMATION BELIEVE THAT IT WILL HONOR ITS PROMISES TO PROVIDE PROl TABLE
NETWORK &INALLY INVESTMENT BANKS INCREASINGLY BUNDLE DEALS IN EXCHANGE FOR THEIR DATA 7HY DO THE INVESTMENT
SECONDARY MARKET SERVICES LIKE DERIVATIVES TRADING WITH THEIR BANKS COUNTERPARTIES TRUST IT TO KEEP PROMISES TO WHICH IT
NEW ISSUES WORK IS NOT LEGALLY BOUND 4HE ANSWER LIES AT THE HEART OF INVEST
&INALLY ISSUERS OF NEW SECURITIES PARTICIPATE IN THE INFOR
MENT BANKING THE PARTIES TO THESE PROMISES RELY UPON THEIR
MATION MARKETPLACE AS BUYERS OF INFORMATION THAT WILL HELP REPUTATIONS #OUNTERPARTIES WILL ONLY TRUST AN INVESTMENT
THEM TO SELL THEIR SECURITIES BANK THAT HAS IN THE PAST KEPT ITS PROMISES )NVESTMENT
7E SAW IN THE PREVIOUS SECTION THAT THE THREAT OF EXCLUSION BANKS THAT RENEGE UPON AGREEMENTS CANNOT EXPECT TO BE
FROM A PROl TABLE RELATIONSHIP IS AN IMPORTANT ENFORCEMENT TRUSTED IN THE FUTURE AND SO WILL LOSE THEIR ABILITY TO MAKE
MECHANISM FOR THE TYPE OF PRIVATE LAWS THAT SUPPORT THE EXTRA
LEGAL CONTRACTUAL AGREEMENTS 4HESE AGREEMENTS ARE AT
INFORMATION
GATHERING THAT PRECEDES AN INITIAL PUBLIC OFFER
THE HEART OF THE INVESTMENT BANKS BUSINESS AND SO IT WILL DO
ING &OR THIS THREAT TO HAVE TEETH THE INVESTMENT BANK MUST WHATEVER IS NECESSARY TO PROTECT ITS REPUTATION
ENSURE THAT ITS COUNTERPARTIES EARN SUFl CIENT PROl TS FROM THEIR 2EPUTATIONS ARE VALUABLE PRECISELY BECAUSE THEY CAN
RELATIONSHIPS TO CARE ABOUT LOSING THEM AND IT MUST HAVE BE RISKED IN TRADE 4HE DANGER THAT THEY WILL BE IMPAIRED
SUFl CIENT ALTERNATIVE RELATIONSHIPS TO ADD CREDIBILITY TO ITS PROVIDES THE INVESTMENT BANKER WITH A CREDIBLE REASON TO
THREAT TO BREAK ONE OF THEM 4HE FORMER REQUIREMENT PLACES A HONOR HIS AGREEMENTS )NVESTMENT BANKERS THEREFORE DESIGN
LOWER BOUND UPON THE FREQUENCY AND THE PROl TABILITY OF EACH THEIR DEALS AND THEIR NETWORKS SO AS TO CREATE A SUFl CIENTLY
OF ITS COUNTERPARTYS TRADES THE LATTER PLACES A LOWER BOUND LARGE REPUTATIONAL COST OF DISHONORING A COMMITMENT
ON THE NUMBER OF COUNTERPARTIES )NVESTMENT BANKS THEREFORE 4HIS IS EASY WHEN DEALING WITH THE FREQUENT TRADERS OF
CANNOT MAINTAIN THEIR RELATIONSHIPS AND THE SERVICES UPON THE INFORMATION AND LIQUIDITY NETWORKS BECAUSE THE LOSS
WHICH THEY REST WITHOUT AN ADEQUATE DEAL m OW OF ANY OF THESE COUNTERPARTIES WOULD HAVE A SIGNIl CANT
3UCCESSFUL INFORMATION AND LIQUIDITY NETWORKS REQUIRE EFFECT UPON THE INVESTMENT BANK )T IS HARDER WHEN DEALING
MORE THAN A MINIMUM DEAL m OW HOWEVER 4HESE NETWORKS WITH RETAIL INVESTORS AND SECURITY ISSUERS MANY OF WHOM
ARE EFFECTIVE ONLY IF THEIR MEMBERS CAN BE SURE OF AN ADEQUATE DEAL INFREQUENTLY THE PROl T FROM RIPPING OFF ONE OF THESE
RETURN ON THEIR INVESTMENT IN INFORMATION )NFORMATION COUNTERPARTIES MAY GREATLY OUTWEIGH THE LOSS OF EXPECTED
LEAKAGE IS THEREFORE DAMAGING A TRADER WHO IS NOT BOUND PROl TS FROM FUTURE BUSINESS WITH IT )N THIS CASE THE INVEST
BY THE RULES OF THE INFORMATION MARKETPLACE WILL TRADE ON MENT BANK CAN CREDIBLY COMMIT TO KEEP ITS PROMISES ONLY IF
LEAKED INFORMATION AND IN SO DOING WILL DIMINISH OR POSSI
FAILING TO DO SO WOULD IMPAIR ITS ABILITY TO DEAL WITH MANY
BLY DESTROY ITS VALUE TO THE MEMBERS OF THE INVESTMENT BANKS OTHER COUNTERPARTIES )T ACHIEVES THIS BY CREATING A PUBLIC
NETWORK (ENCE INVESTMENT BANKS WILL NATURALLY ATTEMPT TO REPUTATION SECURITY ISSUERS AND RETAIL INVESTORS WILL REFUSE
AVOID EXCESSIVE OVERLAP BETWEEN THEIR NETWORKS 7E ARGUE IN TO DEAL WITH AN INSTITUTION WITH A WEAK REPUTATION AND THE
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FEAR OF REPUTATIONAL LOSS SHOULD BE ENOUGH TO UNDERWRITE THE ACTIVE BOARD PARTICIPANTS &OR EXAMPLE "RAD $E ,ONG l NDS
INVESTMENT BANKS PROMISES THAT BETWEEN AND THE PRESENCE OF A MEMBER OF
THE *0 -ORGAN PARTNERSHIP ON A COMPANYS BOARD ADDED
#BOLT&BSMZ$IBMMFOHFT ABOUT TO THE VALUE OF ITS COMMON STOCK #ORPORATIONS
7E HAVE DELIBERATELY AVOIDED A DETAILED DISCUSSION OF THE WERE NATURALLY EAGER THAT THE INVESTMENT BANKER SHOULD ADD
MECHANICS OF INVESTMENT BANKING IN THIS SECTION )NDEED AS LUSTER TO THEIR STOCK ISSUES IN THIS WAY
WE NOTED IN OUR INTRODUCTION THE THINGS THAT INVESTMENT 4URN
OF
THE
CENTURY INVESTMENT BANKER ACTIVISM HAD
BANKS DO CHANGE OVER TIME 7HAT HAS REMAINED CONSTANT IS SIGNIl CANT CONSEQUENCES FOR THE STRUCTURE OF CORPORATE
THE INVESTMENT BANKERS MISSION TO ENFORCE PRIVATE LAWS !MERICA IN THE TH CENTURY "ETWEEN AND
THAT SUPPORT THE EXCHANGE OF CRITICAL INFORMATION 4HIS l RMS MERGED 53 3TEEL $U0ONT )NTERNATIONAL (ARVESTER
SECTION IDENTIl ES NETWORK AND REPUTATION MANAGEMENT AS 0ITTSBURGH 0LATE 'LASS 'ENERAL %LECTRIC AND 0ROCTER AND
THE TWO CORE COMPETENCIES THAT SUPPORT THIS MISSION 4HESE 'AMBLE WERE ALL FORMED AT THIS TIME *0 -ORGAN PLAYED A
ARE COMPLEX SKILLS 4HUS WHILE WE CAN IDENTIFY THE INSTITU
LEADING ROLE IN THESE CONSOLIDATIONS ALONG WITH A NUMBER OF
TIONAL STRUCTURE THAT SUPPORTS NETWORK AND REPUTATION OTHER INVESTMENT BANKS
MANAGEMENT WE CANNOT HOPE IN A SHORT ARTICLE TO EXPLAIN 4HE LATE TH AND EARLY TH CENTURIES ALSO SAW A SIGNIl
PRECISELY WHAT IT IS THAT INVESTMENT BANKERS DO ALL DAY CANT ROLE FOR INVESTMENT BANKERS AS PRIVATE LAW
MAKERS IN
)NDEED WE THINK THAT THIS IS A TECHNOLOGICAL FEATURE OF MANY THE BANKRUPTCY COURTS "ETWEEN AND A THIRD OF
INVESTMENT BANKING SKILLS WHILE YOU CAN LEARN THE TECHNICAL ALL 53 RAILROAD COMPANIES DEFAULTED ON THEIR DEBT ,IQUI
DETAILS OF DERIVATIVE PRICING OR COMPANY VALUATION FROM A DATING THEIR ASSETS WAS ALMOST AN IMPOSSIBILITY SO IT WAS
BOOK OR IN THE CLASSROOM YOU CAN LEARN HOW TO BE AN INVEST
NECESSARY TO REORGANIZE THEIR l NANCES SO THAT THEY COULD
MENT BANKER ONLY THROUGH ON
THE
JOB TRAINING AND CLOSE CONTINUE AS GOING CONCERNS "ANKRUPTCY LAW WAS EXTREMELY
CONTACT WITH EXPERTS 4HAT IS TO SAY INVESTMENT BANKING IS A UNDEVELOPED AT THIS TIME AND IT WAS ALMOST NON
EXISTENT
TACIT RATHER THAN A CODIl ABLE SKILL FOR LARGE CORPORATIONS 4HE INVESTMENT BANKS HAD ORGANIZED
.ETWORKS REPUTATION AND TACIT SKILLS WERE IMPOR
THE SALE OF RAILROAD SECURITIES AND A BOTCHED REORGANIZATION
TANT IN THE EARLIEST INVESTMENT BANKS AND THEY REMAIN SO WOULD HAVE DAMAGED THEIR REPUTATIONS 4HEY THEREFORE
TODAY -ASSIVE COMMUNICATIONS PROBLEMS AND UNDEVELOPED STEPPED INTO THE BREACH AND EFFECTIVELY INVENTED WITH THE
LEGAL SYSTEMS MADE NETWORK CREATION AND MAINTENANCE COOPERATION OF THE COURTS A BODY OF REORGANIZATION LAW
DIFl CULT FOR THE EARLIEST BANKS -ANY OF THEM RELIED UPON THAT BECAME KNOWN AS THE EQUITY RECEIVERSHIP 4HE EQUITY
FAMILY MEMBERS WHOM THEY COULD TRUST TO MANAGE DISTANT RECEIVERSHIP WAS BASED ON A BODY OF CASE LAW WITH WHICH
BUSINESSES "ROWN "ROTHERS THE 2OTHSCHILDS AND THE THE INVESTMENT BANKS WERE INTIMATELY FAMILIAR )T PROVED TO
"ARINGS WERE ALL FAMILY BUSINESSES ,ATER MARKET ENTRANTS BE A VERY SUCCESSFUL PROCEDURE WHICH LASTED UNTIL THE
SUCH AS THE (OUSE OF -ORGAN +UHN ,OEB #O ,EHMAN #HANDLER !CT DROVE THE INVESTMENT BANKS ALONG WITH THEIR
"ROTHERS AND 'OLDMAN 3ACHS CONTINUED TO DRAW THEIR CLOSE CLIENT RELATIONSHIPS AND THEIR REPUTATIONAL CONCERNS
PARTNERS AND OFTEN THEIR WIVES FROM A CLOSE
KNIT SOCIAL OUT OF CORPORATE REORGANIZATIONS
CIRCLE )NVESTMENT BANKERS SERVED LONG APPRENTICESHIPS !MERICAN CORPORATE LAW BECAME INCREASINGLY SOPHIS
DURING WHICH THEY ACQUIRED THE TACIT SKILLS UPON WHICH THEY TICATED THROUGHOUT THE TH CENTURY BUT THERE WAS STILL A
WOULD LATER RELY SIGNIl CANT ROLE IN LARGE AND COMPLEX TRANSACTIONS FOR INFOR
!S THE TH
CENTURY INVESTMENT BANKS FORMED CLOSER MAL AGREEMENTS THAT WERE HONORED FOR REPUTATIONAL REASONS
REPEAT
DEALING RELATIONSHIPS WITH SECURITY ISSUERS THEIR )NVESTMENT BANKS COULD INTERMEDIATE THESE AGREEMENTS AND
REPUTATIONS BECAME INCREASINGLY TIED UP IN THE SUCCESS OF AT THE START OF THE TH CENTURY THEY WERE CENTRAL INSTITU
THEIR CLIENTS )NVESTMENT BANKERS WHO WISHED TO MAINTAIN TIONS IN !MERICAS ECONOMY !CCORDING TO &RITZ 2EDLICH
THEIR REPUTATIONAL CAPITAL THEREFORE ASSUMED AN ACTIVE NOT MORE THAN SIX l RMS WERE RESPONSIBLE FOR MANAGING THE
OVERSIGHT ROLE IN THEIR CORPORATE COUNTERPARTIES "Y THE END ORGANIZATION OF THE LARGE
SCALE SECTOR OF THE 53 ECONOMY IN
OF THE CENTURY ALL OF THE LEADING INVESTMENT BANKS WERE THE l RST DECADE OF THE TH CENTURY AND NOT MORE THAN
MEN )NVESTMENT BANKS WOULD NEVER AGAIN EXERT THE SAME
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DEGREE OF INm UENCE THE FOLLOWING CENTURY WOULD SEE THEM CENTURY AND THEN TO THE 0ROGRESSIVE MOVEMENT OF THE EARLY
BUFFETED BY POLITICAL WINDS AND CHALLENGED BY TECHNOLOGI
PART OF THE TH 4HEIR WIDER CONSEQUENCE WAS TO LEGITIMIZE
CAL ADVANCES 7E EXAMINE EACH OF THESE EFFECTS IN TURN AN INTERVENTIONIST VIEW OF INDUSTRY AFTER A HALF CENTURY IN
WHICH LAISSEZ
FAIRE
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)NVESTMENT BANKS CREATE AND ENFORCE EXTRA
LEGAL CONTRACTS BUSINESS AND MONOPOLY POWER AND AFTER THE S IN A
BUT THEY OPERATE IN THE SHADOW OF THE FORMAL LAW &OR EXAM
BELIEF IN AT LEAST PARTIAL DIRECTION OF THE ECONOMY
PLE BECAUSE THE BLACK
LETTER LAW PROVIDES AN OUTSIDE OPTION 4HE STATE WAS PERCEIVED IN THE TH CENTURY AS FULl LLING
TO THE COUNTERPARTIES TO AN INFORMAL AGREEMENT IT AFFECTS A PASSIVE ENABLING ROLE 4HE SHIFT IN THE EARLY TH CENTURY
THE WAY THAT THEY BARGAIN &ORMAL LAW THEREFORE AFFECTS THE TO A PURPOSIVE VIEW OF THE STATE HAD AND CONTINUES TO HAVE
NATURE OF THE INFORMAL LAWS THAT INVESTMENT BANKS CREATE PROFOUND IMPLICATIONS FOR INVESTMENT BANKS 4HE CHANGED
)NFORMAL LEGAL INSTITUTIONS SUCH AS INVESTMENT BANKS RELATIONSHIP BETWEEN BANKERS ON THE ONE HAND AND REGULA
ALSO AFFECT THE FORMAL LAW )NVESTMENT BANKS AT THE START TORS BUREAUCRATS AND LEGISLATORS ON THE OTHER WAS SIGNALLED
OF THE TH CENTURY SAT AT THE CENTER OF A WEB OF INFORMAL WHEN IN THE .EW 9ORK 3UPERINTENDENT OF )NSURANCE
CONTRACTS THAT ALLOCATED CAPITAL AND SO ORGANIZED MUCH OF RECOMMENDED THE hELIMINATION OF 7ALL 3TREET CONTROLv &OR
!MERICAN PRODUCTION &OR A LEGISLATOR LOOKING TO MAKE THE FOLLOWING HALF CENTURY 7ALL 3TREET AND THE INVESTMENT
HIS MARK THIS DEGREE OF INm UENCE CONCENTRATED IN SO FEW BANKS IN PARTICULAR WERE SUBJECTED TO THE CLOSE SCRUTINY OF A
HANDS WAS A VERY ATTRACTIVE TARGET ,EGISLATION THAT BROUGHT NUMBER OF #ONGRESSIONAL COMMITTEES
INVESTMENT BANKING OUT OF THE EXTRA
LEGAL SECTOR AND INTO 4HE EVIDENCE SUGGESTS THAT THE COMMITTEES WERE NOT
THE PURVIEW OF THE FORMAL LAW WOULD HAVE TRANSFERRED MUCH DISINTERESTED SEEKERS OF THE TRUTH 4HE 0UJO #OMMITTEE OF
OF THE INVESTMENT BANKERS POWERS TO THE STATE !ND BECAUSE WAS FORMED TO INVESTIGATE THE hCONCENTRATION OF MONEY
IT WAS BACKED BY THE COURTS THE STATE WOULD HAVE BEEN FAR AND CREDIT v POPULARLY REFERRED TO AS THE hMONEY TRUSTv )TS
LESS CONSTRAINED BY REPUTATIONAL CONSIDERATIONS THAN THE COUNSEL WAS 3AMUEL 5NTERMEYER A MILLIONAIRE CORPORATE
INVESTMENT BANKS LAWYER WHO BROUGHT TO HIS TASK A PROGRESSIVIST CONVICTION THAT
,EGISLATORS COULD SEEK THIS TYPE OF INm UENCE FOR ALL SORTS THE INVESTMENT BANKS WERE TOO BIG AND THAT THERE WAS INSUF
OF REASONS 4HEY MIGHT HAVE A SIMPLE DESIRE TO FEATHER THEIR l CIENT COMPETITION BETWEEN l NANCIERS &ERDINAND 0ECORA
OWN NESTS AND THOSE OF THEIR FRIENDS 4HEY MIGHT EQUALLY WHO WAS APPOINTED AFTER &RANKLIN $ 2OOSEVELTS ELECTION AS
BE DRIVEN BY A GENUINE WISH TO IMPROVE THE WELL
BEING OF THE COUNSEL FOR AN INVESTIGATION INTO STOCK MARKET PRACTICES WAS
POLITY BY REFORMING AN INSTITUTIONIN THIS CASE THE INVEST
LIKEWISE A hWHOLESALE SUBSCRIBER TO THE BIGNESS
IS
BADNESS
MENT BANKTHEY REGARD AS CORRUPT OR INEFl CIENT THESISv 7ILLIAM ,EUCHTENBURG QUOTES -ORGAN AS SAYING
)RRESPECTIVE OF THEIR MOTIVATION THE POLITICAL CLIMATE THAT h0ECORA HAS THE MANNER AND THE MANNERS OF A PROSECUT
AT THE START OF THE TH CENTURY FAVORED LEGISLATORS OF AN ING ATTORNEY WHO IS TRYING TO CONVICT A HORSE THIEFv
INTERVENTIONIST STRIPE !MERICAN SOCIETY WAS CHANGED BY THE 4HE 0UJO AND 0ECORA COMMITTEES LIKE THE OTHER INVES
INDUSTRIAL ADVANCES OF THE TH CENTURY 3OME TRADITIONAL TIGATIONS OF THE PRE
7ORLD 7AR )) YEARS DID NOT ALLOW
INDUSTRIES WERE DISPLACED AND A NEW MIDDLE CLASS EMERGED INVESTMENT BANKERS TO CALL THEIR OWN WITNESSES PRESENT THEIR
EMPLOYED BY LARGE CORPORATIONS OVER WHICH LOW
AND MIDDLE
OWN EVIDENCE OR CROSS
EXAMINE OTHER WITNESSES .OTWITH
RANKING EMPLOYEES HAD LITTLE IF ANY INm UENCE 4HOSE WHO STANDING THIS BIAS THE INVESTIGATIONS HAD A PROFOUND
BELIEVED THEMSELVES TO BE LOSERS IN THE NEW SYSTEM WERE EFFECT BOTH UPON PUBLIC CONCEPTIONS OF INVESTMENT BANKS
UNDERSTANDABLY HOSTILE TOWARDS THE CORPORATIONS AND THE AND UPON LAW
MAKERS &OURTEEN MONTHS BEFORE THE 0UJO
BANKERS WHO WERE BELIEVED TO HAVE CREATED THE SYSTEM !T COMMITTEE OPENED THE +ANSAS STATE LEGISLATURE PASSED A
THE SAME TIME MANY MEMBERS OF THE MIDDLE CLASS WHILE LAW TO REGULATE SECURITY MARKET ACTIVITIES "Y EVERY
PROSPEROUS FELT DISENFRANCHISED BY AN ECONOMIC SYSTEM STATE EXCEPT .EVADA HAD A SECURITIES LAW MOST LAWS WERE
IN WHICH THEY BELIEVED THAT hSOMEWHERE BY SOMEONE MODELLED UPON THE +ANSAS LEGISLATION
THE DEVELOPMENT OF INDUSTRY IS BEING CONTROLLEDv 4HESE 4HE NEW SECURITY LAWS MAY HAVE EXPRESSED A POPULAR
SENTIMENTS GAVE RISE l RST TO THE 0OPULISM OF THE LATE TH DISCONTENT WITH THE SECURITIES INDUSTRY BUT THEY WERE POORLY
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DRAFTED AND BADLY ADMINISTERED !LTHOUGH .EW 9ORK WAS AND NOT OF MONOPOLISTIC TENDENCIES IN THE MARKET )F AS THE
REGARDED AS HAVING THE MOST EFFECTIVE LAWS .93% OFl CIALS !RMSTRONG COMMITTEE OF NOTED INSURANCE COMPA
ESTIMATED IN THAT APPROXIMATELY HALF OF THE BILLION NIES PARTICIPATED IN UNPROl TABLE AS WELL AS PROl TABLE NEW
DOLLARS OF FRAUDULENT SECURITIES PEDALLED ANNUALLY IN THE ISSUES THEY COULD SIMPLY HAVE BEEN FULl LLING THEIR SIDE OF
5NITED 3TATES WERE SOLD IN THE 3TATE )N CONTRAST PRIVATE THE BARGAIN IN A LIQUIDITY NETWORK 7HEN INVESTMENT BANKS
REGULATION FARED WELL 4HE .93% WHOSE SURVIVAL DEPENDED PARTICIPATED IN ONE ANOTHERS ISSUES THEY COULD HAVE BEEN
UPON ITS REPUTATION FOR PROBITY SUCCESSFULLY ENFORCED BUILDING AND MAINTAINING REPUTATIONS THAT WERE ESSENTIAL TO
DETAILED PRE
LISTING DISCLOSURE REQUIREMENTS THE m OTATION OF LARGE ISSUES !ND THE DIFl CULTIES EXPERIENCED
"UT AS SUGGESTED AT THE START OF THIS SECTION THE .93%S BY NEW ENTRANTS TO THE INVESTMENT BANKING MARKET COULD
PRIVATE ARRANGEMENTS COULD BECOME THE FOCUS OF LEGISLA
HAVE REm ECTED THE IMPORTANCE OF AN ESTABLISHED REPUTATION
TIVE ATTENTION 4HIS IS PRECISELY WHAT HAPPENED DURING THE IN ATTRACTING CLIENTS RATHER THAN THE ERECTION BY EXISTING
.EW $EAL BANKS OF BARRIERS TO ENTRY
4HE .EW $EALERS WERE A BROAD CHURCH 3OME EXHIB
7E ARGUE IN OUR BOOK THAT A FAILURE TO APPRECIATE THESE
ITED A PROGRESSIVE DISTRUST OF LARGE BUSINESSES OTHERS FAVORED ARGUMENTS CAN LEAD EVEN WELL
INTENTIONED LEGISLATORS INTO
CLOSE INTERVENTION IN DAY
TO
DAY ECONOMIC LIFE (OWEVER ILL
CONCEIVED REGULATIONS 4HIS OBSERVATION REMAINS VALID
THEY COULD ALL AGREE ON THEIR ANTIPATHY TOWARDS 7ALL 3TREET TODAY IT MAY BE HARD TO DISTINGUISH BETWEEN SOCIALLY
4HE EFFECT OF SOME OF THE .EW $EAL LEGISLATION UPON INVEST
VALUABLE EXTRA
LEGAL CONTRACTING AND SOCIALLY DAMAGING ANTI
MENT BANKS WAS SHORT
LIVED BUT OTHER LAWS HAD LASTING COMPETITIVE BEHAVIOR BUT WITHOUT AN APPRECIATION OF THE
AND SIGNIl CANT CONSEQUENCES 4HE 'LASS
3TEAGALL !CT OF IMPORTANCE TO THE SECURITY MARKETS OF INFORMAL AGREEMENTS
*UNE SEPARATED INVESTMENT BANKING FROM COMMERCIAL REGULATORS ARE LIKELY TO MAKE THE WRONG CHOICES !RGUABLY
BANKING IT REMAINED A SOURCE OF CONTROVERSY UNTIL ITS REPEAL THIS IS WHAT HAPPENED WHEN IN /CTOBER THE *USTICE
YEARS LATER 4HE 3ECURITIES %XCHANGE !CT OF CREATED $EPARTMENT l LED A SUIT AGAINST INVESTMENT BANKS ACCUS
THE 3ECURITIES AND %XCHANGE #OMMISSION WHICH ACQUIRED ING THEM OF A CONSPIRACY DATING BACK TO TO SUPPRESS
EXTENSIVE POWERS TO ENFORCE NEW &EDERAL SECURITIES LAWS INVESTMENT BANKING COMPETITION 4HE TRIAL LASTED FROM
4HE #HANDLER "ILL EXCLUDED INVESTMENT BANKS FROM .OVEMBER TO -AY AND IT WAS A DISASTER FOR THE
THE DESIGN OF CORPORATE REORGANIZATIONS THEY DID NOT RETURN GOVERNMENT &OR THE l RST TIME IN THE CENTURY THE INVEST
UNTIL THE PASSAGE OF THE BANKRUPTCY CODE MENT BANKS COULD CALL THEIR OWN WITNESSES AND INTERROGATE
3OME LEGAL INNOVATIONS OF THE .EW $EAL LIKE THE THOSE CALLED BY THE *USTICE $EPARTMENT 4HE *USTICE $EPART
DISCLOSURE REQUIREMENTS OF THE 3ECURITIES !CT HAVE MENT WAS UNABLE TO PROVE ANY OF ITS ALLEGATIONS )NDEED IN
BEEN RECEIVED POSITIVELY BY ACADEMIC COMMENTATORS DISMISSING THEIR CASE WITH PREJUDICE THE TRIAL JUDGE (AROLD
ALTHOUGH EVEN THIS !CT HAS BEEN CRITICIZED FOR ANTI
COMPETI
2 -EDINA STATED THAT h4HE GOVERNMENT CASE DEPENDS
TIVE CLAUSES IN ITS CONDUCT
OF
BUSINESS RULES /THER LAWS ENTIRELY UPON CIRCUMSTANTIAL EVIDENCEv
LIKE THE #HANDLER "ILL AND THE 'LASS
3TEAGALL !CT HAVE BEEN 4HE FAILURE OF THE ANTI
TRUST CASE USHERED IN A PERIOD OF
LESS ENTHUSIASTICALLY RECEIVED "UT IRRESPECTIVE OF THEIR SOCIAL RELATIVELY LIGHT GOVERNMENT INVOLVEMENT IN THE INVESTMENT
UTILITY WE SUGGEST THAT THE REASONING BEHIND THESE !CTS BANKING INDUSTRY #HANGES TO INVESTMENT BANKING IN THE
REm ECTED A PROFOUND MISUNDERSTANDING OF THE NATURE OF THE SUBSEQUENT YEARS LARGELY REm ECTED AND CONTINUE TO REm ECT
INVESTMENT BANKING INDUSTRY TECHNOLOGICAL IMPERATIVES )T IS TO THESE THAT WE TURN IN THE
7E HAVE ARGUED THAT INVESTMENT BANKS ARE IMPORTANT NEXT SECTION
BECAUSE THEY HELP TO CREATE AND ENFORCE INFORMAL EXTRA
LEGAL
CONTRACTS OVER PRICE
RELEVANT INFORMATION 4HIS MISSION 5FDIOPMPHJDBM$IBOHFBOE*OWFTUNFOU#BOLJOH
CAN ONLY BE ACCOMPLISHED BY INSTITUTIONS THAT HAVE LONG
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TERM PROl TABLE RELATIONSHIPS WITH INVESTORS AND CLIENTS NEEDS OF THE BUSINESS WORLD AND THE TECHNOLOGICAL IMPOSSI
AND STRONG REPUTATIONS )N OTHER WORDS THE VERY FEATURES BILITY OF RECORDING CERTAIN TYPES OF INFORMATION FOR USE IN
OF THE INVESTMENT BANKING INDUSTRY TO WHICH THE .EW COURT 4ECHNOLOGICAL CHANGE ALTERS THE AREAS IN WHICH ENTRE
$EALERS AND THEIR PROGRESSIVE PREDECESSORS OBJECTED WERE PRENEURS AND CAPITALISTS DEMAND INFORMAL LAWS AND HENCE
IN FACT THE PRINCIPAL CONTRIBUTIONS THAT THE BANKS MADE TO CHANGES THE SHAPE AND THE COMPOSITION OF THE INVESTMENT
THE WORKINGS OF THE ECONOMIC SYSTEM 4HE FACT THAT INVES
BANKING MARKET 4HE EFFECTS OF TECHNOLOGICAL CHANGE UPON
TORS HAD LONG
TERM REPEAT DEALINGS WITH THEIR INVESTMENT THE INVESTMENT BANKING WORLD HAVE BEEN PARTICULARLY
BANK WAS PROBABLY EVIDENCE OF A SUCCESSFUL RELATIONSHIP PROFOUND IN THE LAST YEARS
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!LTHOUGH HE WOULD HAVE NOTED THEIR EXIT FROM THE IS COSTLY TO AND BINDING ON THE SENIOR EMPLOYEE 7E ARGUE
LENDING MARKET AND THE CORPORATE REORGANIZATION BUSINESS THAT THE PARTNERSHIP FORM EMERGED AS A SOLUTION TO THIS
*OHN 0IERPONT -ORGAN WOULD HAVE FOUND THE INVESTMENT CONTRACTING PROBLEM
BANKS OF THE EARLY S REASONABLY FAMILIAR )NVESTMENT 0ARTNERSHIPS PROVIDE SERVICES THAT RELY HEAVILY ON TACIT
BANKS AT THIS TIME WERE NOT PARTICULARLY WELL
CAPITALIZED SKILL 0RECISELY BECAUSE IT IS HARD TO PROVE THE POSSESSION
4HEY WERE STILL ORGANIZED AS PARTNERSHIPS AND SOME OF OF TACIT SKILLS PARTNERSHIPS DEPEND ON THEIR REPUTATIONS TO
THE PARTNERSHIPS WERE STILL DOMINATED BY MEMBERS OF THE ATTRACT CUSTOMERS AND COMMAND HIGH FEES FOR THEIR SERVICES
FOUNDING FAMILY )NVESTMENT BANKERS STILL TENDED TO SPEND "ECAUSE THEIR l NANCIAL CAPITAL IS TIED UP IN THEIR l RM THE
THEIR ENTIRE CAREER IN ONE l RM AND MUCH OF THEIR ENERGY PARTNERS HAVE A STRONG INCENTIVE TO PROTECT ITS REPUTATIONAL
WAS DEVOTED TO CREATING AND MAINTAINING CLOSE RELATIONSHIPS CAPITAL 0ROMOTING AN UNSKILLED AGENT TO THE PARTNERSHIP
WITH INVESTORS AND WITH SECURITY ISSUERS -OST CLERICAL WORK WOULD ULTIMATELY DAMAGE ITS REPUTATION AND SO LOWER THE
WAS PERFORMED BY HAND SINCE COMPUTERS WERE STILL VIRTUALLY VALUE OF THE SENIOR PARTNERS STAKE (ENCE WE ARGUE THAT
UNHEARD
OF ON THE 7ALL 3TREET OF PARTNERS WILL MENTOR JUNIOR EMPLOYEES TO PROTECT THEIR
/F COURSE THE MARKETS HAD CHANGED IN SIGNIl CANT WAYS PARTNERSHIPS REPUTATION AND TO PRESERVE THE VALUE OF THEIR
SINCE *0 -ORGANS TIME 4URN
OF
THE
CENTURY INVESTMENT PARTNERSHIP STAKE
BANKS HAD LARGELY SOLD SECURITIES TO WEALTHY INDIVIDUALS AND 4HE PARTNERSHIP FORM IS THEREFORE CONSONANT WITH THE
INSTITUTIONS 7HILE THE MOST ARISTOCRATIC OF INVESTMENT BANKS HEAVY HISTORIC RELIANCE WITHIN INVESTMENT BANKS UPON TACIT
CONTINUED TO CONCENTRATE UPON A FEW LARGE INVESTORS ANOTHER SKILL 7HY THEN WAS IT ECLIPSED IN THE LAST YEARS BY THE
RETAIL
ORIENTED BUSINESS HAD SPRUNG UP ALONGSIDE THEM &IRMS JOINT STOCK CORPORATE FORM 7E ARGUE THAT TWO FACTORS WERE AT
LIKE -ERRILL ,YNCH $EAN 7ITTER %ASTMAN $ILLON AND 0AINE WORK l RST AN INCREASING NEED WITHIN INVESTMENT BANKS FOR
7EBBER HAD WIDESPREAD NETWORKS OF OFl CES PEDALLING SHARES l NANCIAL CAPITAL AND SECOND ADVANCES IN COMPUTERIZATION
TO SMALL INVESTORS #OMMISSIONS ON SECURITY TRANSACTIONS AND l NANCIAL ENGINEERING THAT DIMINISHED THE IMPORTANCE
ACCOUNTED FOR ABOUT OF -ERRILL ,YNCHS MILLION TO INVESTMENT BANKING OF TACIT SKILL
REVENUE IN WITH TRADITIONAL INVESTMENT BANKING REPRE
)F A MANAGER SHIRKS HIS MENTORING OBLIGATIONS HE AVOIDS
SENTING ONLY l VE PERCENT OF THE TOTAL THE PERSONAL COSTS OF MENTORING WHILE THE REPUTATIONAL
5NTIL THE RULES OF THE .EW 9ORK 3TOCK %XCHANGE DAMAGE TO THE PARTNERSHIP IS SHARED BY ALL OF THE PARTNERS
PRECLUDED PUBLIC QUOTATION FOR MEMBER l RMS 7HEN THE 4HIS PLACES AN UPPER BOUND ON THE SIZE OF THE PARTNERSHIP
RULES CHANGED THEY DID SO IN RESPONSE TO DEMANDS FROM AND HENCE UPON ITS l NANCIAL CAPITALIZATION (ISTORICALLY
MEMBER l RMS MANY OF WHICH WERE INVESTMENT BANKS 4HESE INVESTMENT BANKS HAD LITTLE l NANCIAL CAPITAL AND SO WERE
DEMANDS HAD NOT ARISEN ANY TIME IN THE PREVIOUS CENTURY NOT GREATLY AFFECTED BY THIS CONSTRAINT "UT MATTERS STARTED
7HY THEN HAD THE PARTNERSHIP FORM BEEN SO APPROPRIATE FOR TO CHANGE WITH THE ADVENT IN OF MAINFRAME COMPUTERS
INVESTMENT BANKS FOR SO LONG BASED UPON TRANSISTOR RATHER THAN VALVE TECHNOLOGY 4HE
)N A RECENT ARTICLE IN THE !MERICAN %CONOMIC 2EVIEW WE RESULT WAS AN IMMEDIATE JUMP IN COMPUTING POWER WHICH
ANALYZED THE OPERATION OF PARTNERSHIP l RMS 0ARTNERSHIPS WAS FOLLOWED THROUGH THE REMAINDER OF THE DECADE BY STEADY
ARE PREVALENT IN BUSINESSES WHICH LIKE INVESTMENT BANKING DROPS IN THE COST OF COMPUTER HARDWARE
LAW AND MANAGEMENT CONSULTING RELY HEAVILY ON TACIT SKILL
TACIT
TACIT SKILL 4HE COMPUTERS OF THE S WERE WELL SUITED TO BATCH
2ECALL THAT TACIT SKILL IS THE KIND THAT CAN BE ACQUIRED ONLY PROCESSINGTHAT IS TO PRE
PLANNED RUNS OF STANDARDIZED
THROUGH CLOSE ON
THE
JOB CONTACT WITH AN EXPERT MENTOR COMPUTER TASKS FREQUENTLY ON AN OVERNIGHT BASIS 4HE REAL
-ANAGING THE INFORMATION NETWORKS UPON WHICH SECURITY TIME INTERROGATION OF COMPUTER SYSTEMS THAT WE TAKE FOR
ISSUANCE RELIES IS A TACIT SKILL SO TOO IS THE ABILITY TO PROVIDE GRANTED TODAY WAS STILL SOME WAY IN THE FUTURE (ENCE THE
ADVISORY SERVICES TO MERGING OR RESTRUCTURING l RMS 4ACIT MOST NATURAL APPLICATION FOR BATCH PROCESSING WAS IN THE
SKILL HAS THEREFORE MADE AN IMPORTANT CONTRIBUTION TO THE RETAIL INVESTMENT BANKS WHICH AS WE HAVE ALREADY OBSERVED
EFl CIENT STRUCTURING OF CORPORATE !MERICA OVER THE LAST TWO SPENT A SUBSTANTIAL PROPORTION OF THEIR REVENUES ON SETTLE
CENTURIES )T HAS CONSIDERABLE SOCIAL VALUE AND SHOULD BE MENT (OWEVER ALTHOUGH COMPUTERIZED BATCH PROCESSING
TRANSFERRED FROM ONE GENERATION TO THE NEXT HAD THE POTENTIAL TO REVOLUTIONIZE SETTLEMENT ACTIVITY IT WAS
4HE PROBLEM FOR INVESTMENT BANKS IS THE IMPOSSIBIL
COST
EFFECTIVE ONLY ON A VERY LARGE SCALE (IGHLY CAPITALIZED
ITY OF EXHIBITING TACIT SKILL IN A COURTROOM (OW THEN CAN RETAIL INVESTMENT BANKS THAT COULD TAKE ADVANTAGE OF THE
SENIOR AND JUNIOR EMPLOYEES ENFORCE A MENTORING AGREEMENT NEW TECHNOLOGY THEREFORE HAD A SUBSTANTIAL ADVANTAGE OVER
THAT ENHANCES THE JUNIOR AGENTS TACIT SKILL LEVEL BUT WHICH THEIR SMALLER COMPETITORS
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UPPER BOUND ON THE SIZE OF THE PARTNERSHIP )N THE S 4HESE DEVELOPMENTS DIRECTLY UNDERMINED THE PARTNERSHIP
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PROCESSING TECHNOLOGY )NVESTMENT BANKS THEREFORE FACED A THEY HAD FURTHER RAMIl CATIONS 4HE CODIl CATION OF TRADING
TRADE
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AND WITH IT THEIR TACIT SKILLS OR THEY COULD EMBRACE JOINT INCREASED THE SKILL BASE IN THESE AREAS !T THE SAME TIME IT
STOCK OWNERSHIP WHICH WOULD LOWER THEIR SETTLEMENT COSTS FACILITATED FORMAL CONTRACTING ON BANKER PERFORMANCE
WHILE AT THE SAME TIME IMPAIRING THEIR ABILITY TO PASS ON WHICH HAD PREVIOUSLY BEEN IMPOSSIBLE 4HE VALUE OF INVEST
TACIT SKILL ,ARGE WHOLESALE INSTITUTIONS LIKE -ORGAN 3TANLEY MENT BANKER REPUTATION PLUMMETED IN MANY BUSINESSES
RELIED ON LARGELY TACIT SKILLS IN UNDERWRITING ADVISORY WORK AND FOR THE l RST TIME IN A CENTURY MANY INVESTMENT BANK
AND TRADING IN THE ABSENCE OF A RETAIL CLIENT NETWORK THEIR ING ACTIVITIES BECAME HIGHLY CONTESTABLE 3PREADS IN MANY
SETTLEMENT WORK WAS RELATIVELY SIMPLE (ENCE FOR THESE l RMS TRADING BUSINESSES WERE DRIVEN DOWN AND THE MINIMUM
THE TRADE
OFF WAS SIMPLE THEY REMAINED PARTNERSHIPS EFl CIENT SCALE INCREASED 7HOLESALE BANKS THAT DID NOT
"UT AT THE BEGINNING OF THE S RETAIL HOUSES LIKE EXPAND SUFl CIENTLY WOULD BE UNABLE TO COMPETE IN SECURI
-ERRILL ,YNCH MAY HAVE FOUND THE DECISION HARDER TO MAKE TIES MARKETS AND THEY NEEDED CAPITAL TO l NANCE THEIR
4HE RAPID INCREASE IN TRADING VOLUMES DURING THE S EXPANSION
FORCED THEIR HANDS .93% MEMBER l RMS THAT DEPENDED ON 4HESE TRENDS PUSHED THE WHOLESALE BANKS INTO THE CAPITAL
MANUAL BACK OFl CE PROCEDURES WERE UNABLE TO COPE WITH MARKETS 4HEY STARTED TO GO PUBLIC IN WHEN 7HITE
THE TRANSACTION VOLUME THAT FACED THEM "ETWEEN AND 7ELD WAS ACQUIRED BY -ERRILL ,YNCH 4HE EARLY MOVERS IN
MEMBER l RMS FACED A BACK
OFl CE CRISIS THAT ULTIMATELY THIS m OTATION WAVE WERE HEAVILY INVOLVED IN THE SECURITIES
FORCED THE .93% TO CLOSE ON 7EDNESDAYS TO ALLOW MEMBER MARKETS 4HE HOLDOUTS WERE l RMS THAT GENERATED A SUBSTAN
l RMS TO CLEAR SETTLEMENT BACKLOGS -ANY RETAIL l RMS WITHOUT TIAL PROPORTION OF THEIR REVENUES FROM ADVISORY WORK WHERE
COMPUTERIZED BACK OFl CES WENT TO THE WALL TACIT SKILL WAS STILL ESSENTIAL AND l NANCIAL CAPITAL WAS OF LESS
4HE BACK
OFl CE CRISIS SHOWED THAT THE RETAIL BANKS HAD IMPORTANCE 4HE ONLY REMAINING SUBSTANTIAL PRIVATELY OWNED
TO EMBRACE COMPUTERS IF THEY WERE TO SURVIVE (ENCE BY THE WHOLESALE HOUSES IN WERE 'OLDMAN 3ACHS AND ,AZARD
END OF THE S THERE WAS A GREAT DEAL OF PENT
UP DEMAND &RERES BOTH OF WHICH WERE THEN FOCUSED UPON ADVISORY
BY RETAIL INVESTMENT BANKS FOR CAPITAL TO l NANCE EXPANSION ACTIVITIES 'OLDMAN m OATED IN AND ,AZARD IN
TO A SCALE WHERE COMPUTERIZATION WAS FEASIBLE 7HEN IN &IGURE WHICH ALSO COMES FROM OUR BOOK ILLUS
THE .93% ACCEPTED THE INEVITABLE AND ALLOWED ITS MEMBERS TRATES THE TRENDS WE HAVE JUST DESCRIBED !S FORMERLY TACIT
TO BE PUBLICLY OWNED RETAIL
ORIENTED INVESTMENT BANKS KNOWLEDGE BEGAN TO BE CODIl ED IN THE S INDIVIDUAL
WENT PUBLIC IN RAPID SUCCESSION INVESTMENT BANKERS COULD ACHIEVE GREATER ECONOMIES OF SCALE
7HOLESALE
ORIENTED INVESTMENT BANKS WERE LARGELY FROM THEIR SKILLS (ENCE AS SHOWN IN THE l GURE THERE WAS
UNTOUCHED BY THESE CHANGES 4HEIR UNDERWRITING ADVISORY A SHARP RISE IN THE AMOUNT OF l NANCIAL CAPITAL PER EMPLOYEE
AND TRADING BUSINESSES STILL DEPENDED LARGELY ON RELATION
IN THE TOP l VE INVESTMENT BANKS 4HE NUMBER OF EMPLOYEES
SHIPS AND TACIT SKILL AND THEY HAD LITTLE NEED FOR THE IN THESE BANKS INCREASED FOURFOLD BETWEEN AND
MAINFRAME COMPUTERS THAT DROVE THE RETAIL
ORIENTED l RMS AS THEY SOUGHT THE ECONOMIES OF SCALE AT WHICH THEIR TRADING
INTO PUBLIC OWNERSHIP &OR WHOLESALE INVESTMENT BANKS IT ACTIVITIES WOULD BE VIABLE !T THE SAME TIME THERE WAS A
WAS THE ADVENT OF CHEAP DISTRIBUTED DESKTOP COMPUTERS THAT STEADY DROP IN THIS PERIOD IN THE SHARE OF THE TOTAL INDUSTRY
TIPPED THE BALANCE AGAINST THE PARTNERSHIP FORM AND IN FAVOR CAPITALIZATION ACCOUNTED FOR BY SMALLER BANKS THE COMBINED
OF m OTATION 4HESE COMPUTERS FACILITATED THE INTRODUCTION CAPITALIZATION OF THE TOP TO INVESTMENT BANKS FELL FROM
OF THE FORMAL MODELLING TECHNIQUES OF l NANCIAL ECONOM
OF THE TOP TEN IN TO IN AND TO JUST
ICS INTO CORPORATE l NANCE AND IN PARTICULAR INTO SECURITIES IN
VALUATION AND TRADING )NVESTMENT BANKS ARE STILL WRESTLING WITH THE PROBLEMS
4HE INTRODUCTION OF FORMAL ECONOMIC MODELS INTO WHOLE
THROWN UP BY THE MOVE TO JOINT STOCK FORM /NE OF THE
SALE INVESTMENT BANKS HAD A PROFOUND EFFECT !DVANCES LIKE MOST SIGNIl CANT HAS BEEN A MASSIVE INCREASE IN LABOR
THE "LACK
3CHOLES OPTION PRICING MODEL WERE INTRODUCED TO MARKET MOBILITY 0ARTNERSHIP STAKES WERE GENERALLY VERY
BUSINESS SCHOOL SYLLABUSES AND ACTIVITIES LIKE OPTION TRADING ILLIQUID SO THAT PARTNERS TENDED TO STAY WITH THE SAME l RM
AND VALUATION THAT WERE ONCE LEARNED THROUGH LENGTHY ON
FOR THEIR ENTIRE CAREER 0ARTNERSHIPS ALSO FOSTERED OPACITY
THE
JOB APPRENTICESHIPS COULD SUDDENLY BE ACQUIRED AT ARMS SO THAT IT WAS EXTREMELY HARD FOR OUTSIDERS TO DETERMINE
LENGTH IN THE CLASSROOM #OMPUTERIZATION AND THE S THE QUALITY OF THE JUNIOR STAFF IN OTHER l RMS AND SO TO
REVOLUTION IN l NANCIAL ECONOMICS COMBINED TO EXPUNGE OR HIRE THEM AWAY 4HIS OPACITY ENSURED THAT THE PARTNERSHIP
AT LEAST GREATLY TO REDUCE THE TACIT DIMENSION FROM INVEST
HAD THE PICK OF THEIR BEST EMPLOYEES AND IN NEGOTIATIONS
MENT BANKING OVER NEW ADMISSIONS TO THE PARTNERSHIP IT ENSURED THAT
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THE EXISTING PARTNERS HAD THE WHIP HAND 4HE DEMISE OF #OVENANTS .OT TO #OMPETE OR #.#S WHICH RESTRICT
THE INVESTMENT BANKING PARTNERSHIP REVERSED BOTH OF THESE THE EMPLOYEES ABILITY TO WORK FOR A COMPETITOR WITHIN A
MECHANISMS SENIOR EMPLOYEES WERE NO LONGER TIED TO THE SPECIl C PERIOD AFTER LEAVING THE l RM !LTHOUGH #.#S
ORGANIZATION AND OUTSIDE SHAREHOLDERS WOULD NOT TOLERATE HAVE BECOME COMMONPLACE SINCE INVESTMENT BANKS WENT
THE OPAQUE REPORTING THAT HAD MADE IT HARD FOR JUNIORS TO PUBLIC CONTRACTUAL INCOMPLETENESS AND ENFORCEMENT
SWITCH EMPLOYERS #OMMENTATORS IN THE EARLY S NOTED PROBLEMS MAKE THEM AN IMPERFECT SUBSTITUTE FOR THE
THE SUDDEN INCREASE IN JOB
HOPPING AND IT HAS GATHERED INCENTIVES INHERENT IN THE PARTNERSHIP FORM )NVESTMENT
PACE EVER SINCE BANKS HAVE ATTEMPTED TO REINFORCE THEIR EFFECT BY PATENT
,ABOR MOBILITY PRESENTS DIFl CULTIES FOR A RELATIONSHIP
ING l NANCIAL INNOVATIONS SO THAT THE DEPARTURE OF A SKILLED
BASED INDUSTRY LIKE INVESTMENT BANKING )F EMPLOYERS EMPLOYEE NEED NOT MEAN THE LOSS OF EVERYTHING THAT HE OR
EXPECT TO BE HELD TO RANSOM BY A SKILLED WORKER WHO HAS SHE CREATED AT THE l RM 0ATENTING BECAME COMMONPLACE
SEVERAL GOOD OUTSIDE OPTIONS THEY WILL BE LESS WILLING TO ONLY IN THE WAKE OF THE &EDERAL #IRCUIT #OURT OF
INVEST IN TRAINING 4HIS IS NOT A CONCERN WHEN SKILLS ARE !PPEALS DECISION ON 3TATE 3TREET "ANK V 3IGNATURE &INAN
CODIl ABLE SINCE WORKERS CAN IN THIS CASE PAY FOR THEIR OWN CIAL WHICH ESTABLISHED DEl NITIVELY THAT hMETHODS OF DOING
CIAL
TRAINING IN PROFESSIONAL SCHOOLS "UT IT PRESENTS A PROBLEM BUSINESSv WERE PATENTABLE )T IS TOO EARLY TO JUDGE THE
WHEN SOME KEY SKILLS ARE TACIT AND CAN ONLY BE ACQUIRED EFFECTIVENESS OR THE LIKELY IMPACT OF PATENTING UPON INVEST
THROUGH INSTRUCTION BY THE EMPLOYER 4HE PARTNERSHIP MENT BANKS (OWEVER THE EARLY EVIDENCE SUGGESTS THAT
FORM HAD GIVEN INVESTMENT BANKS SOME DE FACTO PROPERTY PATENTS ARE NOT NEARLY AS EFFECTIVE AS THE INFORMAL PARTNER
RIGHTS OVER THEIR EMPLOYEES HUMAN CAPITAL ONCE THEY SHIP
BASED PROPERTY RIGHTS SYSTEMS THAT PRECEDED THEM
JETTISONED IT INVESTMENT BANKS TURNED INSTEAD TO THE &INANCIAL PATENTS ARE HARD TO DOCUMENT PATENT APPLICA
FORMAL LAW TIONS ARE SOMETIMES OF POOR QUALITY AND A GOOD DEAL OF
!TTEMPTS TO CREATE LEGAL RIGHTS OVER INVESTMENT BANK UNCERTAINTY CONTINUES TO SURROUND THEIR ENFORCEABILITY
EMPLOYEE SKILLS TOOK TWO FORMS &IRST INVESTMENT BANKS )N SUMMARY INVESTMENT BANKING HAS BEEN REVOLUTION
ATTEMPTED TO USE THE BLACK
LETTER LAW TO RESTRICT THEIR IZED BY THE TECHNOLOGICAL CHANGES OF THE LAST FOUR DECADES
EMPLOYEES FREEDOM OF MOVEMENT THROUGH THE USE OF -ANY ASPECTS OF INVESTMENT BANKING HAVE BEEN CODIl ED
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EVER BEFORE AND AS A RESULT INVESTMENT BANKS HAVE BEEN RATE FRAUDS THAT WAS UNCOVERED AT THE TURN OF THE CENTURY
FORCED TO JETTISON THE PARTNERSHIP FORM AND THE EXTRA
LEGAL IN %NRON 'LOBAL #ROSSING 7ORLD#OM AND OTHERS RESULTED
PROPERTY RIGHTS IT GAVE THEM OVER MUCH OF THE HUMAN CAPITAL IN POPULAR OUTRAGE AND ULTIMATELY IN LEGISLATION INTENDED
THEY EMPLOYED !TTEMPTS TO USE THE LAW TO RE
CREATE THESE TO CURB THE PERCEIVED EXCESSES OF THE CORPORATE WORLD 4HE
RIGHTS HAVE MET WITH RATHER MIXED SUCCESS 3ARBANES
/XLEY !CT IMPOSES RULES FOR COMPANY AUDITS
7E BELIEVE THAT THE BIGGEST CHALLENGE CURRENTLY FACING RESTRICTS COMPANY POLICIES AND REQUIRES COMPANIES TO SET
INVESTMENT BANKS IS RECONCILING THE EFFECTS OF GALLOPING UP FORMAL AND VERIl ABLE SYSTEMS FOR TRACKING AND CHECK
TECHNOLOGICAL CHANGES WITH THE TACIT SKILLS THAT REMAIN AT ING INTERNAL CONTROLS 4HIS LEGISLATION HAS THEREFORE WORKED
THE HEART OF MUCH OF WHAT THEY DO 4HE FOLLOWING SECTION TO UNDERMINE THE INFORMAL AND TACIT CONTRACTING IN WHICH
EXAMINES THIS CONm ICT INVESTMENT BANKS HAD HISTORICALLY SPECIALIZED
)N SHORT THE TECHNOLOGICAL SHIFT THAT STARTED IN THE S
4DBMFBOE4NBMMOFTT*OWFTUNFOU#BOLJOH TO CODIFY SOME INVESTMENT BANKING ACTIVITIES CONTINUED TO
JOUIFTU$FOUVSZ GATHER PACE THROUGH THE S AND BEYOND ! COMBINA
!LTHOUGH INVESTMENT AND COMMERCIAL BANKING WERE SEPA
TION OF FORMAL ECONOMIC ANALYSIS AND COMPUTERIZATION HAS
RATED BY THE 'LASS
3TEAGALL !CT COMMERCIAL BANKS REDUCED THE IMPORTANCE OF TACIT SKILL IN MANY ACTIVITIES THAT
STARTED IN THE S TO ENCROACH UPON SOME INVESTMENT WERE ONCE THE SOLE PRESERVE OF THE SKILLED HUMAN CAPITALIST
BANKING ACTIVITIES 4HE ESTABLISHMENT IN THE LATE S OF 0LAYERS IN THE AFFECTED BUSINESSES ARE NO LONGER PROTECTED BY
SO
CALLED 3ECTION SUBSIDIARIES ALLOWED SEVERAL MAJOR REPUTATIONAL BARRIERS TO ENTRY AND THEY HAVE BEEN FORCED TO
COMMERCIAL BANKS TO UNDERWRITE CORPORATE DEBT ISSUES EXPAND THE SCALE AND OFTEN THE SCOPE OF THEIR BUSINESSES TO
PROVIDED THIS ACTIVITY ACCOUNTED FOR NO MORE THAT OF COMPETE (OUSES LIKE -ORGAN 3TANLEY WHICH JUST YEARS
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#OMMERCIAL BANKS HAD CLEAR ADVANTAGES IN THE DEBT CAS ELITE FUND
RAISERS ARE TODAY PUBLICLY QUOTED FULL
SERVICE
MARKETS THE SECURITIES WERE SIMILAR TO CORPORATE LOANS WHICH l NANCIAL l RMS OFFERING A WIDE RANGE OF SERVICES FROM RETAIL
THEY HAD ALREADY STARTED TO TRADE ACTIVELY IN A BURGEON
BROKERAGE TO SPECIALIZED CORPORATE ADVICE
ING SECONDARY MARKET AND THE COMMERCIAL BANKS HAD )S A FULL
SERVICE l NANCIAL SERVICES l RM REALLY AN INVEST
THE CAPITAL AND THE COMPUTER SYSTEMS NECESSARY TO MAKE AN MENT BANK IN THE SENSE THAT * 0 -ORGAN #O WAS A
IMPACT #OMMERCIAL BANKS ALSO BROUGHT THEIR CAPITAL TO BEAR CENTURY AGO !T ONE LEVEL THIS IS A TRIVIAL QUESTION INVEST
IN THE NEW DERIVATIVES MARKETS BY TAKING CONTROLLING STAKES IN MENT BANKING IS WHATEVER THE INVESTMENT BANKS DO "UT IT
THE SMALL TRADING PARTNERSHIPS THAT HAD PREVIOUSLY DOMINATED IS REASONABLE TO WONDER WHAT THE COSTS OF EXPANSION HAVE
THESE MARKETS /#ONNOR !SSOCIATES WAS ACQUIRED BY 3WISS BEEN FOR THE BIGGEST l RMS 4RADITIONAL INVESTMENT BANKING
"ANK #24 BY .ATIONS "ANK AND #OOPER .EFF BY ".0 IS RELATIONSHIP
AND REPUTATION
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THE INVESTMENT BANKING MARKET BEFORE THE REPEAL OF MAL PEER
GROUP MONITORING IS POSSIBLE AND WHERE THERE IS
THE 'LASS
3TEAGALL !CT "Y THE l NANCIAL ENGINEERING RELATIVELY LITTLE STAFF TURNOVER ,ARGE FULL
SERVICE BUSINESSES
TECHNIQUES THAT GREW OUT OF EARLY APPLICATIONS OF THE "LACK
HAVE MANY OBVIOUS STRENGTHS BUT THEY ARE FORCED BY BOTH
3CHOLES MODEL TO DERIVATIVES TRADING HAD ACHIEVED A HIGH THEIR SCALE AND THE EXIGENCIES OF REGULATION TO USE FORMAL
DEGREE OF SOPHISTICATION 4ODAYS TRADERS RELY UPON COMPUT
AND CODIl ED REPORTING LINES )T IS VERY DIFl CULT IN PUBLIC
ERS TO ANALYZE AND REPORT THE RISKS OF DERIVATIVES AS WELL AS COMPANIES TO TIE THE SKILLED AGENTS FORTUNES TO THOSE OF THE
TO PLACE A VALUE UPON THEM !ND IT IS POSSIBLE IN TODAYS l RM IN THE WAY THAT OLDER PARTNERSHIPS DID )N SHORT IT IS
l NANCIAL MARKETS TO PARCEL UP AND SELL VIRTUALLY ANY RISK HARDER FOR THE LARGEST l RMS TO CREATE AN ENVIRONMENT WITHIN
#OMMERCIAL BANKS MAY HAVE LACKED SOME OF THE TACIT SKILLS WHICH THE TRADITIONAL HUMAN CAPITALIST CAN PROSPER
OF THE OLDER INVESTMENT BANKING HOUSES BUT IN PLACE OF SUCH -ANY TACIT HUMAN CAPITALISTS HAVE LITTLE NEED FOR THE
SKILLS THEY WERE ABLE TO SUBSTITUTE l NANCIAL CAPITAL AND AN l NANCIAL RESOURCES OF A LARGE l RM )NDEED MANY OF THEM
INVESTMENT IN l NANCIAL ENGINEERS l ND THE CULTURE OF SUCH A l RM UNAPPEALING -OREOVER WE
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,EACH
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HELD COMPANIES )T IS
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SERVICE
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BOUTIQUE 'REENHILL #O STATED IN A RECENT INTERVIEW THAT INGLY CHOOSING TO WORK OUTSIDE THE ORGANIZATIONAL AND
h7ERE TRYING TO RE
CREATE WHAT EXISTED AT THE BIGGER 7ALL REGULATORY CONSTRAINTS OF THE TRADITIONAL INVESTMENT BANK
3TREET l RMS YEARS AGOv 4HE UNREGULATED AND PRIVATELY OWNED INSTITUTIONS TO WHICH
7E DISCUSS THE WORK OF THE BOUTIQUE INVESTMENT THEY HAVE MOVED ARE KNOWN AS HEDGE FUNDS
BANKING l RMS IN DETAIL IN THE l NAL CHAPTER OF OUR BOOK )N SUMMARY BOUTIQUE l RMS EMERGED BECAUSE IT BECAME
7E IDENTIFY THREE AREAS IN WHICH SUCH l RMS ARE LIKELY TO BE INCREASINGLY DIFl CULT FOR INVESTMENT BANKS TO COMBINE
PARTICULARLY COMPETITIVE 4HE l RST IS ADVISORY WORK BOTH THEIR CODIl ED LARGE
SCALE ACTIVITIES WITH THE TACIT HUMAN
IN -! AND IN CORPORATE RESTRUCTURING /NE OF THE EARLI
CAPITAL BUSINESSES THEY HAD TRADITIONALLY PERFORMED 4HE
EST -! ADVISORY l RMS WAS 7ASSERSTEIN 0ERELLA WHOSE COMPENSATION STRUCTURES CAREER STRUCTURE AND GOVERNANCE
EPONYMOUS FOUNDERS ARGUABLY CREATED THE MODERN -! ARRANGEMENTS THAT WORK FOR MORE CODIl ABLE ACTIVITIES ARE
MARKET 4HE S SAW A STEADY RISE IN THE NUMBER OF INAPPROPRIATE FOR BUSINESSES THAT RELY UPON THE TACIT SKILL THAT
BOUTIQUE -! ADVISORS PARTLY BECAUSE -! SPECIAL
HAS TRADITIONALLY BEEN THE INVESTMENT BANKERS CHIEF SELLING
ISTS FREQUENTLY FOUND THE BOUTIQUE l RMS MORE APPEALING POINT (ENCE TO THE EXTENT THAT CLIENTS STILL DEMANDED TACIT
PLACES TO WORK THAN THE LARGER INVESTMENT BANKS AND PARTLY SKILLS INVESTMENT BANKS HAD TO SPIN OFF INTO BOUTIQUES
BECAUSE BOUTIQUE l RMS ARE FREE OF THE CONm ICTS THAT COULD 4HE GROWTH OF BOUTIQUE BUSINESSES COULD THEREFORE BE
POTENTIALLY ARISE IN FULL
SERVICE l RMS ATTRIBUTED AT LEAST IN PART TO THE DESIRE OF THE LARGER INVEST
-! ADVICE IS A RELATIVELY RECENT BUSINESS LINE FOR MENT BANKS TO OUTSOURCE BUSINESSES FOR WHICH THEIR SIZE AND
INVESTMENT BANKS WHICH IDENTIl ED IT AS A SEPARATE BUSINESS GOVERNANCE ARRANGEMENTS MADE THEM ILL
SUITED )N SUPPORT OF
LINE ONLY IN THE S #ORPORATE RESTRUCTURING ADVICE ON THIS INTERPRETATION OF INDUSTRY DYNAMICS WE CAN POINT TO THE
THE OTHER HAND HAS BEEN AN IMPORTANT BUSINESS LINE FOR FREQUENCY WITH WHICH THE TWO TYPES OF l RMS WORK TOGETHER
INVESTMENT BANKS SINCE THE MIDDLE OF THE TH CENTURY &ULL
SERVICE BANKS OFTEN RECOMMEND AN ADVISORY l RM TO A
,IKE -! ADVISORY WORK IT RELIES UPON LONG
TERM RELATION
CLIENT THAT REQUIRES AN UNBIASED hFAIRNESS OPINIONv ON THEIR
SHIPS AND TRUST AND THEREFORE SITS COMFORTABLY IN SPECIALIST PRICING RECOMMENDATIONS !ND IN ANOTHER INCREASINGLY
BOUTIQUE l RMS LIKE $+7 AND (OULIHAN ,OKEY 4HESE l RMS COMMON ARRANGEMENT FULL
SERVICE INSTITUTIONS HELP CLIENTS
EXPERIENCED AN UPSWING WHEN THE DOTCOM BUBBLE BURST AT TO RESOLVE GOVERNANCE PROBLEMS BY REFERRING THEM TO PRIVATE
THE START OF THIS CENTURY EQUITY l RMS THAT CAN TAKE THEM PRIVATE AND PROVIDE CLOSE
)NVESTMENT BANK BOUTIQUES ACT AS PRINCIPALS IN TWO MONITORING )NVESTMENT BANKS ARE ALSO PAYING HIGH PRICES FOR
BUSINESSES PRIVATE EQUITY INVESTMENT AND HEDGE FUND STAKES IN HEDGE FUNDS 7E ARGUE THAT THIS IS HAPPENING PRECISELY
TRADING 0RIVATE EQUITY HOUSES MAKE CONTROL INVESTMENTS IN BECAUSE HEDGE FUND TRADING SKILLS CANNOT BE INCUBATED WITHIN
UNLISTED EQUITY 4HE TACIT RELATIONSHIP AND ANALYTIC SKILLS THAT INVESTMENT BANKS (ENCE THE BANKS STAND AT ARMS LENGTH FROM
ARE IMPORTANT FOR ADVISORY BUSINESSES ARE ALSO ESSENTIAL FOR THE FUNDS TAKE CAPITAL STAKES IN THEM AND PROVIDE THEM WITH
THE ACTIVIST INVESTMENT MANAGEMENT THAT THE PRIVATE EQUITY THE CODIl ABLE SETTLEMENT SKILLS THEY REQUIRE
BUSINESS REQUIRES )NDEED WE DESCRIBED EARLIER THE USE THAT )N SHORT INVESTMENT BANKS ARE OUTSOURCING THEIR MOST
*0 -ORGANS TH
CENTURY PARTNERS MADE OF THEIR RELATION
COMPLEX AND HARD
TO
CODIFY TRADING TO ORGANIZATIONS THAT
SHIPS AND CONTACTS AS BOARD MEMBERS AND ACTIVE INVESTORS ARE BETTER ABLE TO PROVIDE THE RIGHT INCENTIVES AND GOVER
)F SIMILAR SKILLS ARE REQUIRED IN THE PRIVATE EQUITY BUSINESS IT NANCE STRUCTURES TO THE TRADERS
IS NO SURPRISE THAT SO MUCH PRIVATE EQUITY INVESTMENT OCCURS
WITHIN BOUTIQUES THAT CAN SUPPORT INFORMAL REPORTING m AT 0WFSWJFX
REPORTING LINES AND THE TEAMWORK UPON WHICH THEY REST 4O SUM UP THEN TECHNOLOGICAL AND REGULATORY CHANGES THAT
&INALLY WE ARGUE THAT HEDGE FUNDS CAN BE VIEWED AS FAVOR CODIl ABLE SKILLS HAVE RESULTED IN A RESTRUCTURING OF THE
INVESTMENT BANK BOUTIQUES 4HE IMMENSE SCALE OF THE INVESTMENT BANKING INDUSTRY ,ARGE FULL
SERVICE INSTITUTIONS
TRADING OPERATION IN THE TYPICAL FULL
SERVICE INVESTMENT PROVIDE CAPITAL
INTENSIVE AND MORE CODIl ABLE SERVICES
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3ERVICES THAT REMAIN TACIT ARE INCREASINGLY SEPARATED FROM SHIPS WITH KEY INFORMATION PROVIDERS AND USED THIS
THE LARGE l RMS WHICH l ND IT HARD TO PROVIDE THE INCENTIVE INFORMATION TOGETHER WITH A VALUABLE REPUTATION FOR PROBITY
STRUCTURES UPON WHICH TACIT HUMAN CAPITAL BUSINESSES TO ATTRACT SECURITY ISSUERS 4HE TRADITIONAL INVESTMENT BANKER
DEPEND (ENCE ON THE ONE HAND ADVISORY BUSINESS PRIVATE HAD A LARGELY TACIT SKILL SET (E LEARNED HIS TRADE DURING A
EQUITY INVESTMENT AND HEDGE FUND TRADING ARE OFTEN LONG ON
THE
JOB APPRENTICESHIP IN A l RM THAT COULD PROVIDE
PERFORMED IN FOCUSED BOUTIQUES /N THE OTHER HAND THE CLOSE RELATIONSHIPS THE MENTORING AND THE PEER
GROUP
COMPLEX CODIl ABLE ACTIVITIES LIKE TRADE SETTLEMENT FOREIGN MONITORING UPON WHICH TACIT SKILLS RELY
EXCHANGE TRADING AND CUSTODIAL SERVICES ARE PROVIDED BY THE 4HE INFORMATION TECHNOLOGY REVOLUTION OF THE LATE TH
l NANCIAL SUPERMARKETS CENTURY CHANGED EVERYTHING -ANY TRADITIONALLY TACIT SKILLS
)F FUTURE TECHNOLOGICAL ADVANCES FURTHER INCREASE THE WERE CODIl ED AND MASSIVE ECONOMIES OF SCALE BECAME POSSI
hCODIl ABILITYv OF INVESTMENT BANK SKILLS THEY COULD HAVE BLE )NVESTMENT BANKERS JETTISONED THE PARTNERSHIP FORM
EQUALLY PROFOUND EFFECTS &OR EXAMPLE IT IS INCREASINGLY THAT HAD FOSTERED THEIR CREATION AND USE OF TACIT SKILL IN FAVOR
POSSIBLE TO SEPARATE THE TECHNICAL AND CODIl ABLE ELEMENT OF JOINT STOCK INCORPORATION WHICH GAVE THEM ACCESS TO THE
OF INVESTMENT ANALYSIS FROM THE TACIT PART !DVANCES IN CAPITAL REQUIRED TO HARNESS THE NEW ECONOMIES OF SCALE
COMMUNICATIONS TECHNOLOGIES MEAN THAT CODIl ABLE ANALYSIS 4ACIT SKILL DID NOT BECOME IRRELEVANT IN THE CLOSING YEARS
CAN BE PERFORMED ANYWHERE ! GOOD DEAL OF EQUITY ANALYSIS OF THE TH CENTURY BUT IT DID BECOME HARDER AND HARDER TO
IS NOW PERFORMED IN )NDIA AND JUNIOR ANALYSTS IN .EW RECONCILE IT WITH THE FORMAL REPORTING LINES AND THE INCREASED
9ORK LOOK INCREASINGLY LIKE PROJECT COORDINATORS SCALE OF THE OLDER INVESTMENT BANKS !N INDUSTRY REORGANI
)MPROVED COMPUTER TECHNOLOGY IS UNDERMINING THE ZATION WAS PERHAPS INEVITABLE 5SING NEW COMMUNICATIONS
IMPORTANCE OF TACIT CONTRACTING IN RELATED AREAS TOO %ARLIER TECHNOLOGIES INVESTMENT BANKS HAVE STARTED TO SPIN OFF
IN THIS ARTICLE WE POINTED TO THE HISTORIC ROLE OF THE .93% THEIR MOST HUMAN CAPITAL
INTENSIVE ACTIVITIES INTO BOUTIQUE
IN ENFORCING EXTRA
LEGAL CONTRACTS )N THE ABSENCE OF DETAILED INVESTMENT HOUSES WHILE AT THE SAME TIME RETAINING THE
PUBLIC INFORMATION ABOUT TRADES THE %XCHANGE RELIED UPON SETTLEMENT TRADING AND ANALYSIS TASKS THAT LEND THEMSELVES
ITS REPUTATION AND THE CONCERN OF MEMBER l RMS FOR THEIR MOST NATURALLY TO CODIl CATION AND COMPUTERIZATION
REPUTATIONS AND LIKE THE EARLY INVESTMENT BANKS THE .93% 7HAT DOES THE FUTURE HOLD 7E DO NOT HAVE A CRYSTAL
COULD RELY UPON ITS REPUTATION TO CREATE A BARRIER TO ENTRY BALL BUT WE THINK THAT WE CAN DRAW SOME CONCLUSIONS FROM
THAT ENSURED IT WOULD EARN AN ECONOMIC RENT FROM ITS ACTIVI
THE RESEARCH SUMMARIZED IN THESE PAGES &URTHER TECHNICAL
TIES -ODERN COMMUNICATIONS TECHNOLOGY IS CHANGING ALL OF ADVANCES COUPLED WITH AN INCREASINGLY STRIDENT REGULATORY
THAT )T IS BECOMING EASIER AND IT WILL EVENTUALLY BE EASY TO STATE WILL LIKELY RESULT IN MORE CODIl CATION MORE SYSTEMATIZA
CREATE ELECTRONIC MARKETPLACES FOR EQUITY TRADES 0ROVIDED TION AND MORE CONSOLIDATION IN THE LARGEST INVESTMENT BANKS
THE PARTICIPANTS IN THESE MARKETPLACES CAN PUBLICIZE THEIR 4HIS TREND WILL TAKE THE BIGGEST PLAYERS FARTHER FROM THEIR
ACTIONS IN A WAY THAT PUTS THEIR REPUTATIONS AT STAKE THE NEED ORIGINS IN TACIT HUMAN CAPITAL BUSINESSES "UT TACIT SKILL AND
FOR EXCHANGES TO GUARANTEE ADHERENCE TO THE RULES THROUGH INFORMAL CONTRACTS BASED UPON REPUTATION WILL REMAIN CENTRAL
THE THREAT OF EXCLUSION WILL BE DIMINISHED !S EVIDENCE OF FEATURES OF INFORMATIONALLY INTENSIVE SECURITY MARKET TRADES
THIS TREND SEVEN INVESTMENT BANKS HAVE RECENTLY ANNOUNCED 4HE CHALLENGE FACING THE LARGEST INVESTMENT BANKS IS THEREFORE
PLANS TO DEVELOP A PROPRIETARY TRADING PLATFORM TO COMPETE TO RECONCILE THEIR SCALE AND THEIR CODIl CATION WITH THE TACIT
WITH THE ESTABLISHED %UROPEAN EXCHANGES SKILLS UPON WHICH SO MANY OF THEIR RENTS ULTIMATELY DEPEND
$PODMVTJPO ALAN MORRISONJT1SPGFTTPSPG'JOBODFBUUIF6OJWFSTJUZPG0YGPSET
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