Professional Documents
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By Prof. Samie
Origins of IB
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
By the middle of 1800s, professional investment banks had sprung up in the US to help government raise funds for infrastructure projects and the civil war. In the 1830s, commercial banks started adding investment banking services to their regular banking activities in the US. Investment Banking hit a milestone in the 1870s when a syndicate of banks from Europe and US teamed up to buy $50 million worth of US Treasury Bonds for resale to public. The syndicate sold billion dollars' worth of government bonds to large numbers of individual investors through the use of thousands of salesmen and an extensive advertising campaign. This venture marked the first mass securitiesselling operation carried out in the United States.
History of IB
In Great Britain, since 1600s, merchant banks or acceptance houses had been in existence. These concerns financed foreign trade and later the acceptance houses also floated foreign issues in London and accumulated funds for long-term investment abroad. Also important in the evolution of investment banking were private banks, many of which were family enterprises, and finance companies. One of the former, the House of Rothschild, attained a dominant position in the financial centers of Europe during the 1800s and was still influential in the 1900s. European Investment banks (excluding UK) stuck with the universal banking concept and they remained active primarily in their local markets through the 1900s.
History of IB
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. The Great Depression in the 1920s and World War 2 was a bad phase for the investment banking industry. Investment Banks were accused of excessive speculation and the US government stepped in to curtail the same. 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
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 firms included Goldman Sachs, Morgan Stanley, Lehman Brothers, First Boston and others. 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.
Did you know that Morgan Stanley is an offshoot of JP Morgan ?
History of IB
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 1980s, leveraged buyouts and hostile takeovers drove the investment banking business. Investment banks profited handsomely during the boom years of the 1990s and into the tech boom and bubble. IPOs of tech companies was the key investment banking activity through the 1990s.
Current Scenario
Two collapses of the stock market the tech bubble and the sub-prime crisis have taken their toll on the investment banking industry. Landmark companies including Bear Stearns, Lehman Brothers and Merrill Lynch have been destroyed in the sub-prime crisis. Goldman Sachs and Morgan Stanley have moved from pure play investment banks to become commercial banks after the repealing of the Glass-Steagall Act. But still, investment banking remains a key element of our capital markets. Goldman Sachs, UBS, Credit Suisse are the major players in the global investment banking industry.
So what is IB?
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). 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. 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
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. Bloomberg provides a more consolidated definition for an investment 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. Much of the investment banking in its present form owes 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.
Financial Advisory at GS
Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. Its mergers and acquisitions capabilities are evidenced 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. In particular, a significant number of the loan commitments and bank and bridge loan facilities that the group enters into arise in connection with its advisory assignments.
Underwriting at GS
Underwriting services offered by GS includes public offerings and private placements of a wide range of securities and other financial instruments, including: common and preferred stock, convertible and exchangeable securities, investment-grade debt, high-yield debt, sovereign and emerging market debt, municipal debt, bank loans, asset-backed securities and real estate-related securities, such as mortgage-related securities and the securities of real estate investment trusts.
USD Volume (m) 330229.19 281013.66 266066.75 250244.47 216443.58 171453.34 171264.05 125673.1 117245.29 90695.63 79131.64 74380.74 72751.23 69381.93 68129.19
38.8 33.1 31.3 29.4 25.5 20.2 20.1 14.8 13.8 10.7 9.3 8.7 8.6 8.2 8.0
4
5 6 7 8
7.4
7 6.3 5 4.2
26,285.65
24,663.47 22,456.36 17,833.39 14,840.51
3.943
2.899 3.214 3.344 3.793
188
146 106 154 106
9
10 11 12 13 14 15
3.7
2.7 2.1 2 1.6 1.3 1.1
13,267.96
9,576.30 7,494.57 7,260.87 5,705.02 4,447.62 4,035.13 n/a
4.187
3.442 1.34 3.027 1.96 4.184
26
64 2 51 48 6 15
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Mkt Share(%)
7.4 6.5 5.4 5.3 5.1 4.3 4.2 4 3.8 3.7 3.6 3.5 2.2 2 1.7
Fees(%)
0.25 0.171 0.214 0.351 0.339 0.26 0.3 0.267 0.179 0.234 0.326 0.211 n/a 0.211 0.207
Issues
2,231 2,345 2,231 1,519 1,331 2,543 1,322 3,485 1,936 695 1,018 1,001 22 484 620
Conclusion
Investment Banking could be termed as a relatively American phenomenon. Indian Investment Banking industry has still a long way to go before it catches up with its global peers. The sub-prime crisis of 2008 has been a hammer blow for pure play investment banks.