display | more...

Investment banking is the service offered by investment banks. This is not a case of stating the obvious because large investment banks which have multiple lines of business have dedicated investment banking divisions. Thus large investment banks are involved in activities that non investment banks also do, like research; and then they also carry out the investment banking function which is something that only investment banks do. This distinction is important because you would find someone who works in HR, or admin or financial control claiming to be an investment banker because they work in an investment bank.

Investment banks are financial institutions whose business revolves around capital and corporate structure. They provide advisory services to clients who wish to secure financing. If the client is a corporate entity, such financing can be in the form of equity, where shares are sold in an IPO, debt in form of bonds or debentures, or hybrid instruments like preference shares. If the client is a government, the financing is always a debt instrument except where assets are being sold. In addition to securing financing, investment banks can provide financial advisory for business combinations where 2 or more firms merge, one firm acquires another, or a firm is selling off part of its business. Their role here is in advising on the right price to offer or accept depending on which side the firm is on.

Investment banks are known as Merchant Banks in the UK and they do all that has been described above. However, there is another type of institution called a merchant bank that differs from investment/merchant banks. It also offers some advisory services but in addition it extends financing to its clients. In this guise its activities are similar to some aspects of commercial banking which are the types of banks that are more widely known. However, where a commercial bank does a retail business, accepting small deposits and being willing to offer small loans, merchant banks (just like investment banks) only deal with big firms and rich people.

Investment banking firms split their primary money making activities into buy side and sell side. Strictly speaking, only the sell side is investment banking because it is the part concerned with the traditional activity of capital raising. Buy side bankers focus on investing money either for the firm (called proprietary trading) or for clients. If a bank has both activities, each side would have its own research people because they focus on different things. And to ensure objectivity, custom and regulations require that the 2 sides do not discuss their transactions otherwise there is a danger of insider trading. This separation is sometimes known as a chinese wall. Being a sell side person, my biased opinion is that we are cooler and smarter.

This industry is notable for certain things:

1. High pay: Globally, investment banks pay really well. It is sometimes difficult to justify the pay though.

2. Long hours: At every level, it is not uncommon to work an average of 10 hours per week more than other sectors. There are instances where bankers work over 70 hours a week. I was once on a transaction where for about a month, I would be in the office at 7am and leave between 11pm and 1am. This went on for about a month and while I bitched about it at the time, I remember it fondly now.

3. Glamour: The clients are rich and powerful entities. And they pay lavishly. So, bankers wear expensive clothes, have swanky offices, stay in 5 star hotels, eat in top end restaurants and meet in offices of heads of companies or governments or government entities. if the firm is successful, there is also lots of foreign travel. There is also a high ratio of good looking women to not so good looking ones, probably because they are paid enough to be able to afford to spend money on effective enhancements.

4. Intelligent people: There is a lot of math required in the financial side, and deep knowledge of law and tax regulations on the legal side. One also needs to be able to think creatively because a lot of the time, clients hire you to figure out a legal way for them to do something illegal.

The competitive, grueling and innovative nature of the industry means that success in it requires intelligence, drive, energy and relationship management skills. Thus, success in it is seen as a marker for those qualities. Top investment bankers therefore get much respect. In the US, this has led to a custom of the treasury secretary often being an ex-investment banker.

The industry's reputation has been tarnished in the past 30 years, especially with the great recession of 2008 which was caused by investment banks engineering risky financial products and then passing them off as safe. Evidence has emerged that some banks and their staff were aware of the toxic nature of the securities they were peddling, but it is not certain that this sort of behavior was pervasive. In any event, the industry in the US (which, represented by Wall Street, New York is the heart of the global finance industry) was shaken by that event which led to bankruptcies at some banks and major corporate restructuring in the others.

There is a perception that financial institutions, especially investment banks have become divorced from the the real sector. The basic function of finance is financial intermediation i.e. facilitating the flow of money from where it is in surplus, thus yielding nothing or little, to where it is scarce and therefore yielding more. A lot of the activity of investment banks now "seems" to just be speculation and not providing finance. And given their size, reach and complexity, that speculation's negative effects affects the real sector. Unfortunately, given the power of the industry in the UK & US, it does not appear that any change would come any time soon and Main Street will keep getting shafted by Wall Street with only occasional ineffectual remonstration.


Iron Noder 2020, 11/30

Log in or register to write something here or to contact authors.