Shashank

Investment Banking Fellow

FE-00731
5th October, 2022
HISTORY OF INVESTMENT BANKING
The history of banking is a story that must be told in stages. It starts with its birth
after the 1929 Wall Street Crash with the Glass-Steagall Law, and continues to
present day with the Dodd-Frank Law Barack Obama signed after the 2008
financial crisis. Undoubtedly, investment banking as an industry in the United
States has come a long way since its beginnings. Below is a brief about how
investment banking has evolved itself with the passage of time.
1896-1929
The investment banking industry was in a long-lasting bull market prior to the
Great Depression. Market leaders National City Bank and JP Morgan frequently
intervened to influence and sustain the financial system. The man JP Morgan is
credited with rescuing the nation from a disastrous panic in 1907.The 1929 market
crash, which sparked the Great Depression, was caused by excessive market
speculation, particularly by banks using Federal Reserve loans to support the
markets. Panic followed, leading thousands of people to try to withdraw their
money from their bank accounts

1929-1970
The nation's banking system was in disarray during the Great Depression, when
forty percent of banks either failed or were forced to merge. The government
enacted the Glass-Steagall Act, or more specifically, the Bank Act of 1933, with
the intention of rehabilitating the banking industry by erecting a barrier between
investment banking and commercial banking. Additionally, the government sought
to separate investment bankers from brokerage services to avoid a conflict of
interest between the obligation to provide fair and objective brokerage services and
the desire to win investment banking business (i.e., to prevent an investment bank
from knowingly peddling overvalued securities to the investing public to ensure
that the client company uses the investment bank for its future underwriting and
advisory needs).The "Chinese Wall" was the name given to the rules that made it
illegal to act in this way.
1970-1980
The demise of trading commissions and a decline in trading profitability followed
the 1975 repeal of negotiated rates. The trend toward an integrated investment
bank, which provides sales, trading, research, and investment banking under one
roof, began to take root as research-focused boutiques were squeezed out.A
number of financial products, such as derivatives, high yield, and structured
products, gained popularity in the late 1970s and early 1980s and offered
investment banks lucrative returns. In addition, by the end of the 1970s, investment
bankers who were under the impression that Glass-Steagall would one day fail and
result in a securities industry dominated by commercial banks hailed the
facilitation of corporate mergers as the last gold mine. Glass-Steagall did
eventually fall apart, but not until 1999.Additionally, the outcomes were not nearly
as disastrous as initially thought.

1980-2007
Investment bankers had shed their stoic image by the 1980s.A reputation for power
and flair took its place, which was enhanced by a flurry of massive deals during
extremely prosperous times. Even in popular media, where authors Tom Wolfe in
"Bonfire of the Vanities" and Oliver Stone in "Wall Street" focused on investment
banking for social commentary, the exploits of investment bankers persisted.
Finally, as the 1990s came to a close, investment bankers' perceptions were
dominated by an IPO boom. The majority of the astonishing 548 IPO deals
completed in 1999 went public in the internet sector, making it one of the most
ever in a single year.
In November 1999, the Gramm-Leach-Bliley Act (GLBA) was passed, effectively
repealing the Glass-Steagall Act's long-standing prohibitions against combining
banking with securities or insurance companies, allowing for "broad banking." The
GLBA is better viewed as ratifying rather than revolutionizing the practice of
banking because the barriers that separated banking from other financial activities
had been falling for some time. The financial crisis is now history, but its effects
are still felt today. The weakened dominance of Wall Street is one of the most
notable outcomes. However, it has partially facilitated the rise of new financial
centers like Singapore and Hong Kong that are profiting from the economic boom
in China and Southeast Asia. In addition, banks are subject to more stringent
regulations, such as stress tests, just as they were in the wake of the Great
Depression. For example, the United Kingdom is looking to implement ring-
fencing rules, which, like the Glass-Steagall Act, aim to separate lenders' retail
operations from riskier investment banking.

Nevertheless, despite the severe effects of the financial crisis, trust in the
investment banking sector has begun to return. Profits at investment banks are also
rising as a result of the recent M&A frenzy, which is now reaching levels not seen
since the financial crisis. In addition, despite the fact that even the most qualified
experts would have difficulty predicting where the industry is currently headed, if
the investment banking industry's cyclical past is any indication, a second golden
age may well be imminent..