Research Paper Investment Banking
An investment bank is a financial institution that engages in the issuance of securities on behalf of its client. An investment bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds. Investment banks are the banks, which facilitate both the investor, who is in search for good investment opportunity and the invested, who is searching for capital to invest in practical projects. Unlike other types of banks, investment banks do not accept deposits from customers; that is, investment banks do not provide regular banking services to the general public.
The main investment banking activities are issuance of securities, underwriting of securities, providing financial related consultancy services to companies, sitting companies in the acquisition and mergers, and similar services. A few of the world renowned investment banks are JP Morgan, Bank of America, Merrill Lynch, Goldman Sacs, Morgan Stanley, and Credit Issue. Companies use investment banks toward the same end as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds).
Because commercial banks already have funds available from their depositors and an investment bank typically does not, an investment bank must spend considerable time finding investors in order to obtain capital for TTS client. As investment banks are increasingly seeking to become “one-stop” financing sources, many investment banks have set aside billions of dollars of their own capital that they can use to loan to clients directly. Origin of Investment banking Investment banking practices such as extending credit to merchants date back to ancient times.
In the 1 sass, early investment institutions such as acceptance houses and merchant banks helped finance foreign trade and accumulated funds for long-term investments overseas. The nineteenth century saw the rise of several prominent banking partnerships such as those reared by Rothschild, the Barings and the Browns. These firms had their origins in the Atlantic trade, financing the importation of commodities for European manufacturers and helping them export their finished products around the world. In the United States, investment banking received a boost during the American Civil War.
Syndicate banking houses sold millions Of dollars’ worth of government bonds to large numbers of individual investors to help finance the war. This marked the first mass-market securities sales operation, a practice that continued later in the asses to finance the expansion of the transcontinental railroads. The asses also saw the birth of some of the most famous firms in investment banking, many of which are still with us, in one form or another, 150 years later. The firm of J. P. Morgan played a major role in the corporate mergers of the era, such as the merger of U. S. Steel Corp. and the Northern Pacific and Great Northern railroads.
The firm grew to such size and prominence at the turn of the century that J. P. Morgan, the founder, is credited for “saving” Wall Street during the banking crisis of 1 907 by allegedly locking top executives from major banks in his office until they hammered out a solution. Goldman Sacs was founded in 869 by German Jewish immigrants Marcus Goldman who later partnered with his son-in-law, Samuel Sacs. Goldman Sacs was among the pioneers of the initial public offering (PIP), and managed one of the largest Ipso at that time, for Sears, Roebuck and Company in 1906. In the early twentieth century, investment banking expanded dramatically.
One reason was an increase in the number of individuals who owned stock, something that resulted from the prosperous years after the First World War. However, the ensuing run-up in stock prices created an unsustainable bubble that finally collapsed with the Great Depression in 1929. The U. S. Plunged into one of the worst depressions in history. More than 11,000 banks failed or merged, and a quarter of the population was out of work. The excesses of that period and the many bank failures led to a flood of new regulations to protect investors from fraudulent stock promoters and stabilize the banking system.
It led to the passing of the Federal Securities Act of 1 933, which required “full disclosure” of accurate information for publicly offered securities and a prospectus filed with the Securities and Exchange Commission. More importantly for investment banks, the government passed the Glass-Steal Act in 1 933, which compelled commercial banks to Separate themselves from their securities distribution arms. Large universal banks such as JP Morgan, for instance, split into separate entities.
In JP Mooring’s case, it created JP Morgan as a commercial bank, Morgan Stanley as an investment bank, and Morgan Greenfield, as a British merchant bank. The Glass-Steal Act remained in force until it was repealed during the Clinton administration in 1999. Registered Advisor In the United States, it is mandatory for an advisor to be registered as a licensed broker-dealer in order to be able to perform services in the area of Investment banking under the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINER) regulations.
It would be reasonable to deduce that the main reason for imposing such rule (I. E. Broker-dealer registration) is to protect investors and maintain market confidence as well as prevent fraudulent acts due to the fact that unregistered investment bankers may associate with those who have adverse regulatory histories. This may well ruin the legality of transactions in which they are involved. When Things Go Wrong As a consequence of the global financial turmoil in 2008, the era of Investment banking has come to an end as five world leading investment banks have no longer operated in investment banking.
The details are as follows: a. Bear Stearns has collapsed in March 2008. Its assets were acquired by JP Morgan Chase. It would be fair to assume that the collapse of Bear Stearns has initially triggered the global credit crisis which erupted in 2008. B. Lehman Brother filed for bankruptcy protection under chapter 11 of the United States Bankruptcy Code. C. Merrill Lynch was acquired by Bank of America. D. Morgan Stanley and Goldman Sacs have transformed themselves into traditional bank holding companies.
Despite the fact that the end of the Wall Street investment banks has shown that the business model of the investment banking no longer applicable and commercial banks have become a significant financial institution which is speculated to be an important drive towards a country’s economy, the fundamental business of an investment bank, e. G. Dealing or trading in securities, offering financial advice, can continue to operate normally without the need to be the business under the name of investment bank.
Organizational structure of an investment bank: The main activities and Roles Generally, the breakdown of an investment ann. includes the following areas: Corporate Finance, Mergers & Acquisitions, Public Finance, Syndicate, Institutional Sales, Retail Sales, Trading, Over-the- Counter Trading, Research, and Operations. An investment bank is split into the so-called Front Office, Middle Office and Back Office. The individual activities are described below: Front Office Investment banks provide three primary types of services: Corporate Finance services I. E. Easing capital through mergers and acquisitions and underwriting, executing securities. Sales and trading, and General advisory services I. E. Research and structuring. 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. Middle Office Risk Management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent ‘bad’ trades having a detrimental effect to a desk overall.
Another key Middle Office role is to ensure that the above mentioned economic risks are captured correctly and on time. In recent years the risk of errors has become now as “operational risk” and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation. Finance areas are responsible for an investment bank’s capital management and risk monitoring.
By tracking and analyzing the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm’s global risk exposure and the profitability and structure of the firm’s various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer. Compliance areas are responsible for an investment bank’s daily operations’ compliance with FSP regulations and internal regulations.
Often also considered a back-office division. Back Office Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe it provides the greatest job security with the bleakest career prospects of the divisions within an investment bank, many have outsourced operations. It is however a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function.
In recent years due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks. A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank. Technology Technology refers to the IT department. Every major investment bank has considerable amounts of in-house software, created by the Technology team, ho are also responsible for Computer and Telecommunications-based support.
Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading platforms. These platforms can serve as auto-executed hedging to complex model driven algorithms. Private vs.. Public An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be biblically disclosed, while the public areas such as stock analysis deal tit public information.
The US Securities and Exchange Commission (SEC) The US Securities and Exchange Commission (SEC) is the US financial regulator whose responsibilities are to ‘protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. ‘ The financial turmoil has triggered awareness on the importance of appropriate regulations that many of them may be outdated and needed to be reformed as well as institutional collaborations. During the financial turmoil, the SEC has acted for the benefit of investors and the markets along with the Department of Treasury, the Federal Reserve (Fed) and other LIST regulators.
There are attempts to stabilize. The market and take actions against market manipulation, strengthen regulations over credit rating agencies as well as liquidity management practices and capital adequacy requirements. The SEC also enhances the level of disclosure rules in order to improve market’s transparency. Another important matter that should be paid attention to is the Memorandum of Understanding between the SEC and the Federal Reserve which promotes the cooperation between the two major authorities n sharing information for the purpose of achieving optimal results in performing their responsibilities.
An important implication of this cooperation is that activities which are historically overseen by the SEC will also be under the supervision of the Federal Reserve which is a good sign of stronger regulations towards financial institutions and financial markets. Apart from the aforesaid actions, investment banks are particularly being overseen and placed new liquidity requirements which are considered high but will definitely strengthen the stability of investment banks. Also, there is a special aerogram for major investment banks which is an oversight of risk management practices as the importance of Bear Stearns has been aware and addressed.
Another point that is worth noting is that Public Investment Corporation is being established in response to the Department of Treasury under the US president – Barack Beam’s policy to rehabilitate and clear bad debts from the US financial system. The corporation will be funded with a maximum of capital not more than $ 100,MOM to be an initial fund to support the buying of assets and bad loans from banks and other financial institutions that have stopped operating businesses. It is a matter of time to evaluate whether or not this plan is efficient enough to solve the problem in the banking sector.
Transparency and good governance in the corporation are matters that should not be overlooked. Conclusion The fall from grace of investment bankers leading to a radical change in the financial sector’s landscape in advanced countries is a significant development that has had many lessons. From the Issues that were discussed, it can be concluded that there are problems in the US financial and banking systems. Because Of these risks there have been many changes throughout the years to protect the invested. There will always be a problem in the financial world but in order to fix that problem it has to occur.
