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The NYSE traces its origins to a small group of New York brokers who traded in a handful of securities and commodities.
A historical 1792 agreement called as a Buttonwood Agreement was signed among 24 New York brokers to band the brokers into an investment group. The name stemmed from the buttonwood tree that served as the Wall Street meeting place for members of the group. The tree was located at 68 Wall Street. The agreement allowed brokers to trade with each other for a commission. In the early 1800s, the US government regularly issued bonds to finance wars, banks and infrastructure which were sold by merchants along with other commodities.
History of IB
y In the early 1900s, JP Morgan and Company put
together another syndicate to reorganize US Steel from an array of affiliated companies into the first billion dollar corporation by trading shares of its smaller affiliates for the merged entity.
was a bad phase for the investment banking industry y Investment Banks were accused of excessive speculation and the US government stepped in to curtail the same.
y The Glass-Steagall Act, passed on June 16, 1933, and
officially named the Banking Act of 1933, introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Corporation for insuring bank Deposits.
History of IB contd.
y In the mid-20th century, large investment banks were
dominated by the dealmakers. y Advising clients on mergers and acquisitions and public offerings was the main focus of major Wall Street partnerships. y These firms included Goldman Sachs, Morgan Stanley, Lehman Brothers, First Boston and others y That trend began to change in the 1980s as a new focus on trading propelled firms such as Salomon Brothers, Merrill Lynch and Drexel Burnham Lambert into the limelight.
y Did you know that Morgan Stanley is an offshoot of JP Morgan ?
y Investment banks earned an increasing amount of their profits from proprietary trading. y Advances in computing technology also enabled banks to use more sophisticated model driven software to execute trades and generate a profit on small changes in market conditions. y In the 1980s, leveraged buyouts and hostile takeovers drove the investment banking business. y Investment banks profited handsomely during the boom years of the 1990s and into the tech boom and bubble. y IPOs of tech companies was the key investment y banking activity through the 1990s
Current Scenario
y Two collapses of the stock market the tech bubble and the sub-prime crisis have taken their toll on the investment banking industry. y Landmark companies including Bear Stearns, Lehman Brothers and Merrill Lynch have been destroyed in the subprime crisis. y Goldman Sachs and Morgan Stanley have moved from pure play investment banks to become commercial banks after the repealing of the Glass-Steagall Act y But still, investment banking remains a key element of our capital markets. y Goldman Sachs, UBS, Credit Suisse are the major players in the global investment banking industry
So what is IB?
y In a very broad perspective, Investment Banking as the term suggests, is concerned with the primary function of assisting capital market in the movement of financial resources from those who have them (investors) to those who want them (issuers). y It can be inferred that investment banks are the counterparts of banks in the capital markets in discharging the critical function of pooling and allocation of capital. y Over the decades, Investment Banking has transformed itself to suit the technological needs of the world of finance. Investment bankers have always enjoyed celebrity status, but at times have paid the price for excessive flamboyance as well.
IB Defined
y The Dictionary of Banking and Finance defines
investment bank as a term used in the US to mean a bank which deals with the underwriting of new issues and advises corporations on their financial affairs.
bank a financial intermediary that performs a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate re-organizations, acting as brokers to both the individual and the institutional clients and trading in its own account. its origins to the financial markets in USA, due to which American investment banks have been leaders in the world. Therefore, the term Investment Banking can arguably be said to be of American origin.
leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals.
founded in 1869 by Marcus Goldman. On May 7, 1999, the Company converted from a partnership to a corporation and completed an initial public offering of its common stock y On September 21, 2008, the Group became a bank holding company regulated by the Board of Governors of the Federal Reserve System under the U.S. Bank y Holding Company Act of 1956 (BHC Act).
Financial Advisory at GS
y Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. by its significant share of assignments in large, complex transactions for which the bank provides multiple services, including one-stop acquisition financing and cross-border structuring expertise, as well as services in other areas of the firm, such as interest rate and currency hedging.
commitments and bank and bridge loan facilities that the group enters into arise in connection with its advisory assignments.
Underwriting at GS
y Underwriting services offered by GS includes public offerings and private placements of a wide range of securities and other financial instruments, including: y common and preferred stock, convertible and exchangeable securities, investment-grade debt, high-yield debt, y sovereign and emerging market debt, municipal debt, y bank loans, asset-backed securities and real estaterelatedsecurities, such as mortgage-related securities and the securities of real estate investment trusts
Bank of America Merrill 4 Lynch JP Morgan Deutsche Bank AG UBS BNP Paribas Group Lazard LLC Rothschild 5 6 7 8 9 10
Deauchtche 8 Bank
public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing, bridge financing, mezzanine financing and a number of corporate credit products. y While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. y In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential.
their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it.
investment banks. y Merchant Banker has been defined under the Securities & Exchange Board of India (Merchant Bankers) Rules, 1992 as "any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management".
different connotations in the US and other markets. In the US it is primarily a fund based activity while in the UK and in India it is implies intermediation and advisory activity in connection with public floatation of securities. y Investment Banking thus can be defined as a broader term which covers both fund and fee based activities. Merchant banking can either be a fund based activity or a fee based activity
writes reports about their prospects, often with "buy" or "sell" ratings. y While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. y There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. y Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
Banking) in India in 1967 with RBI issuing the second license to Citi in 1970. y These two banks primarily provided services which included loan syndication, equity raising and other advisory services. y In 1972, a Banking Commission report asserted the need for Merchant Banking services in India by public sector banks. y The commission recommended the same structure as American investment banks (Glass-Steagall Act). Merchant banks were meant to manage investments and provide advisory services.
may be granted by SEBI: y Category I to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager
y Category II - to act as adviser, consultant, co-
manager, underwriter, portfolio manager. y Category III - to act as underwriter, adviser or consultant to an issue y Category IV to act only as adviser or consultant to an issue The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker are Category I Rs. 5 crores, Category II Rs, 50 lakhs, Category III Rs. 20 lakhs and Category IV-NIL
Conclusion
y Investment Banking could be termed as a relatively
American phenomenon. y Indian Investment Banking industry has still a long way y to go before it catches up with its global peers. y The sub-prime crisis of 2008 has been a hammer blow for pure play investment banks