Introduction

Introduction to Investment Banking

2. What is an Investment Bank? An investment bank is a global financial

institution that assists corporations and governments in raising capital by
underwriting and acting as the agent/underwriter in the issuance of securities.
Investment Banks serve as a bridge between large corporations and investors.

3. Functions of an Investment Bank Investors Investment Bank Raising capital

Investment banks act as intermediaries between companies who want to raise
money and investors that want to invest money. Mergers and Acquisitions
Market Research Trading Clients

4. List of Investment Banks

5. Clients of an Investment Bank Corporations Financial Institutions Pension

Funds Hedge Funds Government Agencies

6. Clients of an Investment Bank SIZE Size is an asset for investment banks.

Investment Bank Matters The more connections the bank has, the more likely
it is to profit by matching buyers and sellers, especially for unique transactions.

7. Other Features Pre-underwriting counseling Distribution of securities Post

issuance advisory End to end assistance These banks have their own trading
desks. Because they have external clients but also trade their own accounts, a
conflict of interest can occur if the advisory and trading divisions don’t
maintain their independence. CHINESE WALL Client Companies Investing Public
Corporate Finance Dept Sales and Trading Dept. Research Dept.

8. REVENUE GENERATION Structural Roles in an Investment Bank FRONT

OFFICE MIDDLE OFFICE BACK OFFICE Risk Control Negotiations Verifications
Following of Portfolios Administrative functions Book keeping Payment Orders
Operational Control Reporting MARKETS Investment Banking Market Making
Advising on Mergers & Acquisitions Fund Raising Strategies Sales Trading
Research Structuring

9. CAPITAL PROVIDERS CAPITAL USERS Role of an Investment Bank Money

Managers Hedge Funds Pension Funds Insurance Co. Mutual Funds HNIs +
Surplus Corporations Municipalities Governments Provide ideas on how/ when
to use capital – Research Understand client’s needs & build relationships -
Sales Execute transactions based on the client’s investment strategy - Trading -
Deficit Investment Banks

10. & Thank You For Your Attention

Investment Banking

Definition

By JULIA KAGAN

What Is Investment Banking?

Investment banking is a specific division of banking related to the

creation of capital for other companies, governments and other
entities. Investment banks underwrite new debt and equity securities for
all types of corporations, aid in the sale of securities, and help to
facilitate mergers and acquisitions, reorganizations and broker trades for
both institutions and private investors. Investment banks also provide
guidance to issuers regarding the issue and placement of stock.

History of investment banking in the United States

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Philadelphia financier Jay Cooke established the first modern

American investment bank during the Civil War era. However, private
banks had been providing investment banking functions since the
beginning of the 19th century and many of these evolved into investment
banks in the post-bellum era.

[1]
However, the evolution of firms into investment banks did not follow a
single trajectory. For example, some currency brokers such as Prime,
Ward & King and John E. Thayer and Brother moved from foreign
exchange operations to become private banks, taking on some
investment bank functions. Other investment banks evolved from
mercantile firms such as Thomas Biddle and Co. and Alexander
Brothers.
[2][3]

In 1933 the new deal separated investment from commercial banking

through the Glass-Steagall Act. That law was no longer in effect in the
late 1990s, opening the way for the power of investment banking to
accelerate. Its growth was a response to new demands for investment
services, technological changes, deregulation, and globalization.
Investment banks were at the heart of the shadow banking system.
Investment banking played a major role in the outbreak of the global
financial crisis of 2007-9. In the aftermath, leading American investment
banks were converted into bank holding companies, and brought under
new regulations.
 1896-1929

Prior to the great depression, investment banking was in its golden era, with
the industry in a prolonged bull market . JP Morgan and National City Bank
were the market leaders, often stepping in to influence and sustain the
financial system. JP Morgon (the man) is personally credited with saving the
country from a calamitous panic in 1907. Excess market speculation, especially
by bank using Federal Reserve loans to bolster the markets , resulted in the
market crash of 1929, sparking the great depression.

1929 – 1970

During the Great Depression, the nation’s banking system was in shambles,
with 40% of banks either failing or forced to merge. The Glass-steagall Act (or
more specifically, the Bank Act of 1933) was enacted by the government with
the intent of rehabilitating the banking industry by erecting a wall between
commercial banking and investment banking . Additionally , the government
sought to provide the separation between investment bankers and brokerage
services in order to avoid the conflict of interest between the desire to win
investment banking business and duty to provide fair and objective brokerage.

Services (i.e., to prevent the temptation by an investment bank to knowingly

peddle a client company’s overvalued securities to the investing public in order
to ensure that the client company uses the investment bank for its future
underwriting and advisory needs). The regulations against such behavior
became known as the “Chinese Wall”.
 1970-1980

In light of the repeal of negotiated rates in 1975, trading commissions

collapsed and trading profitability declined. Research-focused boutiques were
squeezed out and the trend of an integrated investment bank, providing sales,
trading, research, and investment banking under one roof began to take root.

In the late 70’s and early 80’s saw the rise of a number of financial product
such as derivatives, high yield an structured products, which provided lucrative
returns for investment banks. Also in the late 1970’s the facilitation of
corporate mergers was being hailed as the last gold mine by investment
bankers who assumed that Glass-Steagall would someday collapse and lead to
a securities business overrun by commercial bank. Eventually, Glass-Steagall
did crumble, but not until 1999. And the results weren’t nearly as disastrous as
once speculated.

1980-2007

In the 1980’s , investment bankers had shed their stodgy image. In its place
was a reputation for power and flair, which was enhanced by a torrent of
mega-deals during wildly prosperous times. The exploits of investment bankers
lived large even in the popular media, where author Tom Wolfe in “Bonfire of
the Vanities” and movie-maker Oliver Stone in “Wall Street” focused on
investment banking for their social commentary. Finally, as the 1990’s wound
down, an IPO boom dominated the perception of investment bankes. In 1999,
an eye-popping 548 IPO deals were done – among the most ever in a single
year with most going public in the internet sector.
 INVESTMENT BANKING HISTORY IN THE 20TH CENTURY

In the mid-20th century, large investment banks were dominated by the

dealmakers. Advising clients on mergers and acquisitions and public offerings
was the main focus of major Wall Street partnerships. These “bulge bracket”
firms included Goldman Sachs, Morgan Stanley, Lehman Brothers, First Boston
and others.

That trend began to change in the 1980’s as a new focus on trading propelled
firms such as Salomon Brothers, Merrill Lynch and Drexel Burnham Lambert
into the limelight. Investment banks earned an increasing amount of their
profits from proprietary trading. 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.

In the 1980’s, Financier Michael Milken popularized the use of high yield debt
(also known as junk bonds) in corporate finance and mergers and acquisitions.
This fuelled a boom in leverage buyouts and hostile takeovers (see History of
Private Equity) . Filmmaker Oliver Stone immortalized the spirit of the times
with his movie, Wall Street, in which Michael Douglas played the role of
corporate raider Gordon Gekko and epitomized corporate greed.

An investment bank can also be split into private and public function with an
information barrier which separates the two to prevent information from
crossing .

These scandals paled by comparison to the financial crisis that has enveloped
the banking industry since 2007. The speculative bubble in housing prices
along with an overreliance on sub-prime mortgage lending trigged a cascade
of crises. Two major investment bank, Bear Stearns and Lehman Brothers,
collapsed under the weight of failed mortgage-backed securities. In March,
2008, the Federal government began using a variety of taxpayer-funded
bailout measures to prop up other firms. The Federal Reserve offered a $30
billion line of credit to J.P Morgan chase to that it could acquire Bear Sterns.
Bank of America acquired Merrill Lynch. The last two bulge bracket investment
bank, Goldman Sachs and Morgan Stanley, elected to convert to bank holding
companies and be fully regulated by the Federal Reserve.

Moving forward, the recent financial crisis has weakened both the reputation
and the dominance of U.S. investment banking organizations throughout the
world. The growth of foreign capital markets along with an increase in pools of
sovereign capital is changing the landscape of the industry.

The growing international flow of capital has also opened up opportunities for
investment banking as India , China and the Middle East.
 EVOLUTION OF INVESTMENT BANKING IN INDIA

The origin of investment banking in India can be traced back to the

19th century when European merchant banks set-up their agency
houses in the country to assist in the setting of new projects. In the
early 20th century, large business houses followed suit by establishing
managing agencies which acted as issues house for securities ,
promoters for new projects and also provided finance to Greenfield
ventures. The peculiar features of these agencies was that their
services were brokers also started rendering Merchant banking
services , but theirs was limited due to their small capital base.

In 1967, ANZ Grind lays bank set-up a separate merchant banking

division to handle new capital issues. It was soon followed by
Citibank, which started rendering these services. The foreign banks
monopolized merchant banking services in the country. The banking
committee, in its report in 1972, took note of this which concern and
recommended setting up of merchant banking institutions by
commercial bank and financial institutions. State bank of India
ventured into these business by starting a merchant banking burean
in 1972. In 1972, ICICI became the first financial institution to offer
merchant banking services. JM finance was set-up be Mr. Nimesh
Kampani as an exclusive merchant bank in 1973. The growth of the
industry was very slow during this period. By 1980, the number of
merchant banks rose to 33 and was set-up by commercial banks,
financial institutions and private sector. The capital market
witnessed some buoyancy in the late eighties. The advent of
economic reforms in 1991 resulted in sudden spurt in both the
primary and secondary market. Several new players entered into the
field . The securities scam in may, 1992 was a major setback to the
industry. Several leading merchant bankers, both in public and
private sector were found to be involved in various irregularities.
Some of the prominent public sector players involved in the scam
were can bank financial services, SBI capital markets, Andhra bank
financial services , etc. leading private sector players involved in the
scam included Fair growth financial services and Champaklal
investments and finance (CIFCO).
 Types of Investment Banking jobs

Investment banking is one of the most attractive industry to work in.

not only for people with formal education in finance, people with
diverse backgrounds are looking to join this industry not just for the
money but for the glamour that this industry offers to individuals.

There are different types of jobs within an investment banking firm.

While most of the jobs are with large investment banking firms, like
Goldman Sachs, Morgan Stanley etc., the investment banking wings
of large commercial banks such as Citigroup, Deutsche bank etc.
besides these, there are many boutique investment banks that offer
lucrative careers.
 SKILLS SUGGESTED FOR INVESTMENT BANKERS

Technical Skills

. Academic Background

In the early days of investment banking , not much importance was attached to
academic background. Today, the business has become very complicated and
the skill requirements have multiplied . Consequently, investment banks find it
important to recruit people with the right academic credentials . Typically, for
most of the important jobs, an MBA is a must. Investment banks rely heavily
on campus recruitments

. Conceptual Soundness

One of the major benefits for a professional in an investment bank is the

learning associated with work. The financial skills of an expert are tested to the
core while handling a complicated deal. Comprehensive and in-depth
knowledge of financial and business concepts are essential to sustain business.
Multiple relationships between various factors renders decision-making
difficult. Financial solutions can be provided to the clients only when the
advisor is competent to understand all or at least a majority of them. Before
practical solutions emerge, the tools for decision-making will give greater
choice to the solution provider . A strong grounding in theory and concept
facilitates this.
. Product Specialization

One way to specialize in an investment bank is through products. An expert in

a particular product, say hybrid instruments, can work out financial solution for
any client across the industries. Each client has his or her individual risk taking
ability. To cater to the client on an in basis, appropriate products that would
suit their risk profile should be identified. The client will also at home while
dealing with a product specialist.