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Seerat Jain

Report 3

05 October 2022

History of Investment Banking

There are few job fields which inspire so much awe, respect and curiosity as

investment banking. Despite the heavy hit the industry took during the financial

crisis, investment banks undoubtedly still retain their appeal for those

considering a career in finance. And it is no wonder since 2007 was not the

first time that banks have hit a bump in the road; while the history of investment

banking has not always been straight-forward, the industry has lived through

worse but has still somehow managed to rise again to prosperity like the

proverbial phoenix from the ashes.

How It All Began

While the term ‘investment bank’ gained popularity in the late 19 th – early 20th century,

and largely in relation to the US, investment banking services existed long before Wall

Street. Most of the oldest investment banks started out as merchants trading in

commodities such as spices, silk, metals and so on. In the UK, whose capital still remains
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one of biggest financial centers in the world, the term ‘merchant bank’ is used to describe

an investment bank.

The nineteenth century saw the rise of several prominent banking partnerships such as

those created by the Rothschilds, the Barings and the Browns. At this point, investment

banking had started to evolve into its modern form, with banks underwriting and selling

government bonds.

Investment banking pertains to certain activities of a financial services company

or a corporate division that consist in advisory-based financial transactions on

behalf of individuals, corporations, and governments. Traditionally associated with

corporate finance, such a bank might assist in raising financial capital by

underwriting or acting as the client's agent in the issuance of debt or equity

securities. An investment bank may also assist companies involved in mergers and

acquisitions (M&A) and provide ancillary services such as market making, trading

of derivatives and equity securities, FICC services (fixed income instruments,

currencies, and commodities) or research (macroeconomic, credit or equity

research). Most investment banks maintain prime brokerage and asset management

departments in conjunction with their investment research businesses. As an

industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-

level businesses), and boutique market (specialized businesses).

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Unlike commercial banks and retail banks, investment banks do not take

deposits. From the passage of Glass–Steagall Act in 1933 until its repeal in 1999

by the Gramm–Leach–Bliley Act, the United States maintained a separation

between investment banking and commercial banks. Other industrialized countries,

including G7 countries, have historically not maintained such a separation. As part

of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

(Dodd–Frank Act of 2010), the Volcker Rule asserts some institutional separation

of investment banking services from commercial banking.

All investment banking activity is classed as either "sell side" or "buy side".

The "sell side" involves trading securities for cash or for other securities (e.g.

facilitating transactions, market-making), or the promotion of securities (e.g.

underwriting, research, etc.). The "buy side" involves the provision of advice to

institutions that buy investment services. Private equity funds, mutual funds, life

insurance companies, unit trusts, and hedge funds are the most common types of

buy-side entities.

An investment bank can also be split into private and public functions with a

screen separating the two to prevent information from crossing. The private areas

of the bank deal with private insider information that may not be publicly

disclosed, while the public areas, such as stock analysis, deal with public

information. An advisor who provides investment banking services in the United

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States must be a licensed broker-dealer and subject to U.S. Securities and

Exchange Commission (SEC) and Financial Industry Regulatory Authority

(FINRA) regulation.

In the 1980s, 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 1990s wound down, an IPO boom dominated the perception of

investment bankers. 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.

The enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999

effectively repealed the long-standing prohibitions on the mixing of banking with

securities or insurance businesses under the Glass-Steagall Act and thus permitted “broad

banking.” Since the barriers that separated banking from other financial activities had

been crumbling for some time, GLBA is better viewed as ratifying, rather than

revolutionizing, the practice of banking.

SOURCES/REFERENCE
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http://www.financeinstitute.com/blog/the-history-of-investment-banking/

https://en.wikipedia.org/wiki/Investment_banking

https://www.wallstreetprep.com/knowledge/the-history-of-investment-banking/