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5/29/09 Investment banking - Wikipedia, the free encyclopedia

en.wikipedia.org/wiki/Investment_banking

Investment bankingFrom Wikipedia, the free encyclopedia

An investment bankis a financial institution that assists individuals, corporations, and governments in raising

capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also

assist companies involved in mergers and acquisitions and provide ancillary services such as market making, tradin

of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities).

Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (GlassSteagall

Act) until 1999 (GrammLeachBliley Act), the United States maintained a separation between investment bankin

and commercial banks. Other industrialized countries, including G8 countries, have historically not maintained such

a separation. As part of the Dodd-Frank Act 2010, Volcker Rule asserts full institutional separation of investment

banking services from commercial banking.

There are two main lines of business in investment banking. Trading securities for cash or for other securities (i.e.

facilitating transactions, market-making), or the promotion of securities (i.e. underwriting, research, etc.) is the "sel

side", while buy side is a term used to refer to advising institutions concerned with buying investment services.

Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most commontypes of buy side entities.

An investment bank can also be split into private and public functions with an information barrier which separates

the two to prevent information from crossing. The private areas of the bank deal with private insider information th

may not be publicly disclosed, while the public areas such as stockanalysis deal with public information.

An advisor who provides investment banking services in the United States must be a licensed broker-dealer and

subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA)

regulation.[1]

Contents

1 Organizational structure

2 Core investment banking activities

2.1 Front office

2.1.1 Investment banking

2.1.2 Sales and trading

2.1.3 Research

2.2 Front office/Middle office

2.2.1 Risk Management

2.3 Middle office

2.4 Back office

2.4.1 Operations

2.4.2 Technology

2.5 Other businesses

3 Industry profile

3.1 Global size and revenue mix
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en.wikipedia.org/wiki/Investment_banking 2

3.2 Top 10 banks

4 Financial crisis of 2008

5 Criticisms

5.1 Conflicts of interest

5.2 Compensation

6 See also

7 External links

8 Further reading9 References

Organizational structure

Investment banking is split into front office, middle office, and back office activities. While large service investment

banks offer all lines of business, both sell side and buy side, smaller sell-side investment firms such as boutique

investment banks and small broker-dealers focus on investment banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying securities. For

corporations, investment bankers offer information on when and how to place their securities on the open market,

an activity very important to an investment bank's reputation. Therefore, investment bankers play a very important

role in issuing new security offerings.[2]

Core investment banking activities

Investment banking has changed over the years, beginning as a partnership form focused on underwriting security

issuance (initial public offerings and secondary offerings), brokerage, and mergers and acquisitions and evolving in

a "full-service" range including sell-side research, proprietary trading, and investment management. In the modern21st century, the SEC filings of the major independent investment banks such as Goldman Sachs and Morgan

Stanley reflect three product segments: (1) investment banking (fees for M&A advisory services and securities

underwriting); (2) asset management (fees for sponsored investment funds), and (3) trading and principal

investments (broker-dealer activities including proprietary trading ("dealer" transactions) and brokerage trading

("broker" transactions)).[3]

In the United States, commercial banking and investment banking were separated by the GlassSteagall Act, whic

was repealed in 1999. The repeal led to more "universal banks" offering an even greater range of services. Many

large commercial banks have therefore developed investment banking divisions through acquisitions and hiring.

Notable large banks with significant investment banks include JPMorgan Chase, Bank of America, Credit Suisse,Deutsche Bank, Barclays, and Wells Fargo. After the financial crisis of 20072008 and the subsequent passage o

the DoddFrank Wall Street Reform and Consumer Protection Act, regulations have limited certain investment

banking operations, notably with the Volcker Rule's restrictions on proprietary trading.[2]

The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as

1960, 70% of Merrill Lynch's revenue was derived from transaction commissions while "traditional investment

banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large

brokerage network.[2]
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Front office

Investment banking

Corporate finance is the traditional aspect of investment banks which also involves helping customers raise funds in

capital markets and giving advice on mergers and acquisitions (M&A). This may involve subscribing investors to a

security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment

banking division is corporate finance, and its advisory group is often termed mergers and acquisitions. A pitch booof financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the

bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry

coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcar

public finance (governments), FIG (financial institutions group), industrials, TMT (technology, media, and

telecommunication) and maintains relationships with corporations within the industry to bring in business for the

bank. Product coverage groups focus on financial products such as mergers and acquisitions, leveraged finance,

public finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt and

generally work and collaborate with industry groups on the more intricate and specialized needs of a client. The

Wall Street Journal, in partnership with Dealogic, publishes figures on investment banking revenue such as M&A

in its Investment Banking Scorecard.[4]

Sales and trading

On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In

market making, traders will buy and sell financial products with the goal of making money on each trade. Sales is

the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth

investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their

clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products tha

fit a specific need. Structuringhas been a relatively recent activity as derivatives have come into play, with highly

technical and numerate employees working on creating complex structured products which typically offer muchgreater margins and returns than underlying cash securities. In 2010, investment banks came under pressure as a

result of selling complex derivatives contracts to local municipalities in Europe and the US. [5]Strategists advise

external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivative

to specific industries, strategists place companies and industries in a quantitative framework with full consideration

of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it

would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as we

as the way structurers create new products. Banks also undertake risk through proprietary trading, performed by

special set of traders who do not interface with clients and through "principal risk"risk undertaken by a trader

after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize

profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and tradinhas created jobs for physics, mathematics and engineering Ph.D.s who act as quantitative analysts.

Research

The equity research division reviews companies and writes reports about their prospects, often with "buy" or "sell"

ratings. Investment banks typically have sell-side analysts which cover various industries. Their sponsored funds or

proprietrary trading offices will also have buy-side research. While the research division may or may not generate

revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in
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suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clienwith investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients

will execute suggested trade ideas through the sales and trading division of the bank, and thereby generate revenue

for the firm. However, research does not directly bring in revenue through commission or profit, which arguably

places research in a middle office role. Research also covers credit research, fixed income research,

macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients

but do not directly affect revenue. All research groups, nonetheless, provide a key service in terms of advisory and

strategy. There is a potential conflict of interest between the investment bank and its analysis, in that published

analysis can affect the bank's profits. Hence in recent years the relationship between investment banking and

research has become highly regulated, requiring a Chinese wall between public and private functions.

Front office/Middle office

Risk Management

Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto thei

balance sheet during transactions or trades. Credit risk focuses around capital markets activities, such as loan

syndication, bond issuance, restructuring, and leveraged finance. Market risk conducts review of sales and tradingactivities utilizing the VaR model and provide hedge-fund solutions to portfolio managers. Other risk groups includ

country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis. Credit

risk solutions are key part of capital market transactions, involving debt structuring, exit financing, loan amendment

project finance, leveraged buy-outs, and sometimes portfolio hedging. Front office market risk activities provide

service to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory. Well-

known risk groups in JPMorgan Chase, Goldman Sachs and Barclays engage in revenue-generating activities

involving debt structuring, restructuring, loan syndication, and securitization for clients such as corporates,

governments, and hedge funds. J.P. Morgan IB Risk works with investment banking to execute transactions and

advise investors, although its Finance & Operation risk groups focus on middle office functions involving internal,

non-revenue generating, operational risk controls.[6][7][8]

Credit default swap, for instance, is a famous credit riskhedging solution for clients invented by J.P. Morgan's Blythe Masters during the 1990s. The Loan Risk Solutions

group[9] within Barclays' investment banking division and Risk Management and Financing group [10] housed in

Goldman Sach's securities division are client-driven franchises. However, risk management groups such as

operational risk, internal risk control, legal risk, and the one at Morgan Stanley are restrained to internal business

functions including firm balance-sheet risk analysis and assigning trading cap that are independent of client needs,

even though these groups may be responsible for deal approval that directly affects capital market activities. Risk

management is a broad area, and like research, its roles can be client-facing or internal.

Middle office

This area of the bank includes treasury management, internal controls, and internal corporate strategy.

Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk

monitoring.

Financial control tracks and analyzes the capital flows of the firm, the Finance division is the principal adviser to

senior management on essential areas such as controlling the firm's global risk exposure and the profitability and

structure of the firm's various businesses via dedicated trading desk product control teams. In the United States an

United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer.
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Internal corporate strategy tackling firm management and profit strategy, unlike corporate strategy groups that

advise clients, is non-revenue regenerating yet a key functional role within investment banks.

This list is not a comprehensive summary of all middle-office functions within an investment bank, as specific desks

within front and back offices may participate in internal functions.[11]

Back office

Operations

This involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting

the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank. Due to

increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment

banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and

transactions that occur across all the divisions of the bank.

Technology

Every major investment bank has considerable amounts of in-house software, created by the technology team, wh

are also responsible for technical support. Technology has changed considerably in the last few years as more sale

and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging

purposes.

Firms are responsible for compliance with government regulations and internal regulations.

Other businesses

Global transaction banking is the division which provides cash management, custody services, lending,and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially

profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008.

Investment management is the professional management of various securities (shares, bonds, etc.) and

other assets (e.g., real estate), to meet specified investment goals for the benefit of investors. Investors may

be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via

investment contracts and more commonly via collective investment schemes e.g., mutual funds). The

investment management division of an investment bank is generally divided into separate groups, often know

as Private Wealth Management and Private Client Services.

Merchant banking can be called "very personal banking"; merchant banks offer capital in exchange for

share ownership rather than loans, and offer advice on management and strategy. Merchant banking is also

name used to describe the private equity side of a firm. [12] Current examples include Defoe Fournier & Cie

and JPMorgan's One Equity Partners and the original J.P. Morgan & Co. Rothschilds, Barings, Warburgs

and Morgans were all merchant banks. (Originally, "merchant bank" was the British English term for an

investment bank.)

Commercial banking: see commercial bank.
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Real Estate Increased Equity Collateral Sale Also called REIECS Advanced Financial Model in whic

a Real Estate Asset Value is increased thought an Investment Banking Institution (Usually only the Biggest

Investment Banks are able to handle REIECS.

Industry profile

There are various trade associations throughout the world which represent the industry in lobbying, facilitate

industry standards, and publish statistics. The International Council of Securities Associations (ICSA) is a globalgroup of trade associations.

In the United States, the Securities Industry and Financial Markets Association (SIFMA) is likely the most

significant; however, several of the large investment banks are members of the American Bankers Association

Securities Association (ABASA)[13] while small investment banks are members of the National Investment Bankin

Association (NIBA).

In Europe, the European Forum of Securities Associations was formed in 2007 by various European trade

associations.[14] Several European trade associations (principally the London Investment Banking Association and

the European SIFMA affiliate) combined in 2009 to form Association for Financial Markets in Europe (AFME).

In the securities industry in China (particularly mainland China), the Securities Association of China is a self-

regulatory organization whose members are largely investment banks.

Global size and revenue mix

Global investment banking revenue increased for the fifth year running in 2007, to a record US$84.3 billion,[15]

which was up 22% on the previous year and more than double the level in 2003. Subsequent to their exposure to

United States sub-prime securities investments, many investment banks have experienced losses. As of late 2012,

global revenues for investment banks were estimated at $240 billion, down about a third from 2009, as companiespursued less deals and traded less.[16] Differences in total revenue are likely due to different ways of classifying

investment banking revenue, such as subtracting proprietary trading revenue.

In terms of total revenue, SEC filings of the major independent investment banks in the United States show that

investment banking (defined as M&A advisory services and security underwriting) only made up about 15-20% o

total revenue for these banks from 1996 to 2006, with the majority of revenue (60+% in some years) brought in b

"trading" which includes brokerage commissions and proprietary trading; the proprietary trading is estimated to

provide a significant portion of this revenue.[3]

The United States generated 46% of global revenue in 2009, down from 56% in 1999. Europe (with Middle Eastand Africa) generated about a third while Asian countries generated the remaining 21%. [15]:8 The industry is heavi

concentrated in a small number of major financial centers, including City of London, New York City, Frankfurt,

Hong Kong and Tokyo.

According to estimates published by the International Financial Services London, for the decade prior to the

financial crisis in 2008, M&A was a primary source of investment banking revenue, often accounting for 40% of

such revenue, but dropped during and after the financial crisis.[15]:9 Equity underwriting revenue ranged from 30%

to 38% and fixed-income underwriting accounted for the remaining revenue.[15]:9
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Revenues have been affected by the introduction of new products with higher margins; however, these innovations

are often copied quickly by competing banks, pushing down trading margins. For example, brokerages

commissions for bond and equity trading is a commodity business but structuring and trading derivatives has higher

margins because each over-the-counter contract has to be uniquely structured and could involve complex pay-off

and risk profiles. One growth area is private investment in public equity (PIPEs, otherwise known as Regulation D

or Regulation S). Such transactions are privately negotiated between companies and accredited investors.

Banks also earned revenue by securitizing debt, particularly mortgage debt prior to the financial crisis. Investment

banks have become concerned that lenders are securitizing in-house, driving the investment banks to pursue verticintegration by becoming lenders, which is allowed in the United States since the repeal of the Glass-Steagall act in

1999.[citation needed]

Top 10 banks

Further information: List of investment banks

The ten largest investment banks as of December 31, 2012, are as follows (by total fees from all advisory). [17] Th

list is just a ranking of the advisory arm of each bank and does not include the generally much larger portion of

revenues from sales and trading and asset management.

Rank Company Fees ($m)

1. JP Morgan Chase $5,467.07

2. Bank of America $4,600.05

3. Goldman Sachs $4,150.52

4. Morgan Stanley $3,740.89

5. Citi $3,617.116. Credit Suisse $3,442.95

7. Deutsche Bank $3,319.32

8. Barclays $3,232.53

9. UBS $2,197.52

10. Wells Fargo $1,894.03

World's biggest banks are ranked for M&A advisory, syndicated loans, equity capital markets and debt capital

markets.

The Financial Times, The Wall Street Journal andBloomberg often cover Mergers and Acquisitions and Capit

arkets. League tables are also available:

Investment Banking Review (http://markets.ft.com/investmentBanking/tablesAndTrends.asp),Financial

Times.

Investment Banking Scorecard

(http://graphicsweb.wsj.com/documents/INVESTMENT/InvestmentBankQuarterly_1007.html), Wall Stre

Journal.
http://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://graphicsweb.wsj.com/documents/INVESTMENT/InvestmentBankQuarterly_1007.htmlhttp://en.wikipedia.org/wiki/Financial_Timeshttp://markets.ft.com/investmentBanking/tablesAndTrends.asphttp://en.wikipedia.org/wiki/Capital_Marketshttp://en.wikipedia.org/wiki/M%26Ahttp://en.wikipedia.org/wiki/Bloomberg_L.P.http://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://en.wikipedia.org/wiki/The_Financial_Timeshttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Equity_(finance)http://en.wikipedia.org/wiki/Syndicated_loanhttp://en.wikipedia.org/wiki/M%26Ahttp://en.wikipedia.org/wiki/Wells_Fargohttp://en.wikipedia.org/wiki/UBShttp://en.wikipedia.org/wiki/Barclayshttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Credit_Suissehttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Bank_of_Americahttp://en.wikipedia.org/wiki/JP_Morgan_Chasehttp://en.wikipedia.org/wiki/Asset_managementhttp://en.wikipedia.org/wiki/Sales_and_tradinghttp://en.wikipedia.org/wiki/Investment_banking#cite_note-17http://en.wikipedia.org/wiki/List_of_investment_bankshttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/Accredited_investorhttp://en.wikipedia.org/wiki/Private_investment_in_public_equityhttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)


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Global M&A Financial Advisory Rankings (http://about.bloomberg.com/pdf/glma.pdf),Bloomberg.

Global Capital Markets League Tables (http://about.bloomberg.com/pdf/gcmkt.pdf),Bloomberg.

Financial crisis of 2008

The 2008 financial credit crisis led to the notable collapse of several banks, notably including the bankruptcy of

large investment bank Lehman Brothers and the hurried sale of Merrill Lynch and the much smaller Bear Stearns t

banks which effectively rescued them from bankruptcy. The entire financial services industry, including numerousinvestment banks, was rescued by government loans through the Troubled Asset Relief Program (TARP). Survivin

U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding

companies to accept TARP relief.[18] Similar situations occurred across the globe with countries rescuing their

banking industry. Initially, banks received part of a $700 billion Troubled Asset Relief Program (TARP) intended

stabilize the economy and thaw the frozen credit markets.[19] Eventually, taxpayer assistance to banks reached

nearly $13 trillion, most without much scrutiny,[20] lending did not increase[21] and credit markets remained

frozen.[22]

The crisis led to questioning of the business model of the investment bank[23] without the regulation imposed on it

by Glass-Steagall. Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton

administration and deregulated banks, the previous conservatism of underwriting established companies and seekin

long-term gains was replaced by lower standards and short-term profit.[24] Formerly, the guidelines said that in

order to take a company public, it had to be in business for a minimum of five years and it had to show profitability

for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the fu

impact of the change.[24]

A number of former Goldman-Sachs top executives, such as Henry Paulson and Ed Liddy were in high-level

positions in government and oversaw the controversial taxpayer-funded bank bailout.[24] The TARP Oversight

Report released by the Congressional Oversight Panel found that the bailout tended to encourage risky behavior

and "corrupt[ed] the fundamental tenets of a market economy".[25]

Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of

which was then paid out to 32 entities, including many overseas banks, hedge funds and pensions.[26] The same

ear it received $10 billion in aid from the government, it also paid out multi-million dollar bonuses; the total paid in

bonuses was $4.82 billion.[27][28] Similarly, Morgan Stanley received $10 billion in TARP funds and paid out

$4.475 billion in bonuses.[29]

Criticisms

The investment banking industry, and many individual investment banks, have come under criticism for a variety of

reasons, including perceived conflicts of interest, overly large pay packages, cartel-like or oligopolic behavior,

taking both sides in transactions, and more.[30] Investment banking has also been criticised for its opacity.[31]

Conflicts of interest

Conflicts of interest may arise between different parts of a bank, creating the potential for market manipulation,

according to critics. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in

the United States) require that banks impose a Chinese wall to prevent communication between investment bankin
http://en.wikipedia.org/wiki/Chinese_wall_(financial)http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Financial_Services_Authorityhttp://en.wikipedia.org/wiki/Market_manipulationhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-31http://en.wikipedia.org/wiki/Investment_banking#cite_note-greedmerchant-30http://en.wikipedia.org/wiki/Investment_banking#cite_note-29http://en.wikipedia.org/wiki/Investment_banking#cite_note-28http://en.wikipedia.org/wiki/Investment_banking#cite_note-27http://en.wikipedia.org/wiki/Investment_banking#cite_note-26http://en.wikipedia.org/wiki/Hedge_fundshttp://en.wikipedia.org/wiki/Subpoenahttp://en.wikipedia.org/wiki/Investment_banking#cite_note-25http://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Congressional_Oversight_Panelhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-mt-bubble-24http://en.wikipedia.org/wiki/Bank_bailouthttp://en.wikipedia.org/wiki/Ed_Liddyhttp://en.wikipedia.org/wiki/Henry_Paulsonhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-mt-bubble-24http://en.wikipedia.org/wiki/Investment_banking#cite_note-mt-bubble-24http://en.wikipedia.org/wiki/Bill_Clintonhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Robert_Rubinhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-timesUK-23http://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-22http://en.wikipedia.org/wiki/Investment_banking#cite_note-21http://en.wikipedia.org/wiki/Investment_banking#cite_note-20http://en.wikipedia.org/wiki/Investment_banking#cite_note-19http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Programhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-18http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Programhttp://en.wikipedia.org/wiki/Bear_Stearnshttp://en.wikipedia.org/wiki/Merrill_Lynchhttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/Bloomberg_L.P.http://about.bloomberg.com/pdf/gcmkt.pdfhttp://en.wikipedia.org/wiki/Bloomberg_L.P.http://about.bloomberg.com/pdf/glma.pdf


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on one side and equity research and trading on the other. Critics say such a barrier does not always exist in

practice, however.

Conflicts of interest often arise in relation to investment banks' equity research units, which have long been part of

the industry. A common practice is for equity analysts to initiate coverage of a company in order to develop

relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers

allegedly traded positive stock ratings for investment banking business. Alternatively, companies may threaten to

divert investment banking business to competitors unless their stock was rated favorably. Laws were passed to

criminalize such acts, and increased pressure from regulators and a series of lawsuits, settlements, and prosecutioncurbed this business to a large extent following the 2001 stock market tumble after the dot-com bubble.

Philip Augar, author of The Greed Merchants, said in an interview that: "You cannot simultaneously serve the

interest of issuer clients and investing clients. And its not just underwriting and sales; investment banks run

proprietary trading operations that are also making a profit out of these securities."[30]

Many investment banks also own retail brokerages. During the 1990s, some retail brokerages sold consumers

securities which did not meet their stated risk profile. This behavior may have led to investment banking business o

even sales of surplus shares during a public offering to keep public perception of the stock favorable.

Since investment banks engage heavily in trading for their own account, there is always the temptation for them to

engage in some form of front running the illegal practice whereby a broker executes orders for their own account

before filling orders previously submitted by their customers, there benefiting from any changes in prices induced b

those orders.

Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained byNew York Times

Wall Street Business columnist Joe Nocera alleged that IPOs managed by Goldman Sachs and other investment

bankers involved asking for kickbacks from their institutional clients who made large profits flipping IPOs which

Goldman had intentionally undervalued. Depositions in the lawsuit alleged that clients willingly complied with these

demands because they understood it was necessary in order to participate in future hot issues.[32]

Reuters WallStreet correspondent Felix Salmon retracted his earlier, more conciliatory, statements on the subject and said he

believed that the depositions show that companies going public and their initial consumer stockholders are both

defrauded by this practice, which may be widespread throughout the IPO finance industry.[33] The case is ongoing

and the allegations remain unproven.

Compensation

Investment banking is often criticized for the enormous pay packages awarded those who work in the industry.

According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their executives from 2003 to 200

"while they presided over the packaging and sale of loans that helped bring down the investment-banking system."[34]

The highly generous pay packages include $172 million for Merrill Lynch & Co. CEO Stanley O'Neal from 2003

to 2007, before it was bought by Bank of America in 2008, and $161 million for Bear Stearns Co.'s James Cayne

before the bank collapsed and was sold to JPMorgan Chase & Co. in June 2008.[34]

Such pay arrangements have attracted the ire of Democrats and Republicans in Congress, who demanded limits o

executive pay in 2008 when the U.S. government was bailing out the industry with a $700 billion financial rescue

package.[34]
http://en.wikipedia.org/wiki/Investment_banking#cite_note-3billion-34http://en.wikipedia.org/wiki/Investment_banking#cite_note-3billion-34http://en.wikipedia.org/wiki/Investment_banking#cite_note-3billion-34http://en.wikipedia.org/wiki/Investment_banking#cite_note-Salmon-33http://en.wikipedia.org/wiki/Finance_industryhttp://en.wikipedia.org/wiki/Felix_Salmonhttp://en.wikipedia.org/wiki/Investment_banking#cite_note-Nocera-32http://en.wikipedia.org/wiki/Kickback_(bribery)http://en.wikipedia.org/wiki/Investment_bankerhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Joe_Nocerahttp://en.wikipedia.org/wiki/EToys.comhttp://en.wikipedia.org/wiki/Under_sealhttp://en.wikipedia.org/wiki/Front_runninghttp://en.wikipedia.org/wiki/Investment_banking#cite_note-greedmerchant-30http://en.wikipedia.org/wiki/Dot-com_bubble


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Writing in the Global Association of Risk Professionals, Aaron Brown, a vice president at Morgan Stanley, says

"By any standard of human fairness, of course, investment bankers make obscene amounts of money." [30]

See also

Traditional and alternative investments

List of investment banks

Merchant bankbulge bracket banks: the world's largest and most profitable investment banks whose clients are usually larg

corporations, institutions, and governments.

History of investment banking in the United States

External links

Bloomberg: Wall Street Executives Made $3 Billion Before Crisis (http://www.bloomberg.com/apps/news?

pid=newsarchive&sid=aGL5l6xOPEHc)

Bloomberg: Bonuses on Wall Street Threatened by Credit Crunch (http://www.bloomberg.com/apps/newspid=newsarchive&sid=a2kyW8bmxMd8)

Further reading

Fleuriet Michel Investment Banking Explained: An Insider's Guide to the Industry Mc Graw-Hill New York

NY 2008 ISBN 978-0-07-149733-6

DePamphilis, Donald (2008).Mergers, Acquisitions, and Other Restructuring Activities. New York:

Elsevier, Academic Press. p. 740. ISBN 978-0-12-374012-0.

Cartwright, Susan; Schoenberg, Richard (2006). "Thirty Years of Mergers and Acquisitions Research:Recent Advances and Future Opportunities".British Journal of Management17 (S1): S1S5.

doi:10.1111/j.1467-8551.2006.00475.x (http://dx.doi.org/10.1111%2Fj.1467-8551.2006.00475.x).

Harwood, I. A. (2006). "Confidentiality constraints within mergers and acquisitions: gaining insights through

'bubble' metaphor".British Journal of Management17 (4): 347359. doi:10.1111/j.1467-

8551.2005.00440.x (http://dx.doi.org/10.1111%2Fj.1467-8551.2005.00440.x).

Rosenbaum, Joshua; Joshua Pearl (2009).Investment Banking: Valuation, Leveraged Buyouts, and

Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. ISBN 0-470-44220-4.

Straub, Thomas (2007).Reasons for Frequent Failure in Mergers and Acquisitions: A Comprehensive

Analysis. Wiesbaden: Deutscher Universittsverlag. ISBN 978-3-8350-0844-1.

Scott, Andy (2008). China Briefing: Mergers and Acquisitions in China (2nd ed.).Williams, Mark T. (March 2010). "Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic

Risk Can Still Bring Down the World Financial System" (http://en.wikipedia.org/wiki/Mark_T._Williams).

Mcgraw-Hill.

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bailout/3309/) PBS/WNET "Need to Know" (September 3, 2010). Retrieved March 7, 2011

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(http://www.thewashingtonnote.com/archives/2009/07/banks_use_tarp/) The Washington Note (July 20, 2009).

Retrieved March 7, 2011

22. ^ "Fed May Keep Rates Low as Tight Credit Impedes Small Businesses"

(http://www.businessweek.com/news/2010-04-26/fed-may-keep-rates-low-as-tight-credit-impedes-small-

businesses.html)Bloomberg Businessweek(April 26, 2010). Retrieved March 7, 2011

23. ^ Jagger, Suzy (September 22, 2008). "End of the Wall Street investment bank"

(http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4800550.ece). The

Times (London). Retrieved March 7, 2011.

24. ^ abc Matt Taibbi, "The Great American Bubble Machine" (http://www.rollingstone.com/politics/news/the-great-

american-bubble-machine-20100405) Rolling Stone magazine (April 5, 2010). Retrieved March 7, 2011

25. ^ Edward Niedermeyer, "TARP Oversight Report: Bailout Goals Conflict, Moral Hazard Alive And Well"

(http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-

well/) (January 13, 2011). Retrieved March 7, 2011

26. ^ Karen Mracek and Thomas Beaumont, "Goldman reveals where bailout cash went"

(http://www.usatoday.com/money/industries/banking/2010-07-24-goldman-bailout-cash_N.htm)Des Moines

Register(July 26, 2010). Retrieved March 7, 2011

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(http://blogs.wsj.com/deals/2009/07/30/wall-street-compensation-no-clear-rhyme-or-reason/) The Wall Street

JournalBlogs (July 30, 2009). Retrieved March 7, 2011

28. ^ "Goldman Sachs: The Cuomo Reports Bonus Breakdown" (http://blogs.wsj.com/deals/2009/07/30/goldman-
http://blogs.wsj.com/deals/2009/07/30/goldman-sachs-the-cuomo-reports-bonus-breakdown/http://blogs.wsj.com/deals/2009/07/30/goldman-sachs-the-cuomo-reports-bonus-breakdown/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-28http://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://blogs.wsj.com/deals/2009/07/30/wall-street-compensation-no-clear-rhyme-or-reason/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-27http://www.usatoday.com/money/industries/banking/2010-07-24-goldman-bailout-cash_N.htmhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-26http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-well/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-25http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405http://en.wikipedia.org/wiki/Matt_Taibbihttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-mt-bubble_24-2http://en.wikipedia.org/wiki/Investment_banking#cite_ref-mt-bubble_24-1http://en.wikipedia.org/wiki/Investment_banking#cite_ref-mt-bubble_24-0http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4800550.ecehttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-timesUK_23-0http://en.wikipedia.org/wiki/Businessweekhttp://www.businessweek.com/news/2010-04-26/fed-may-keep-rates-low-as-tight-credit-impedes-small-businesses.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-22http://www.thewashingtonnote.com/archives/2009/07/banks_use_tarp/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-21http://www.pbs.org/wnet/need-to-know/economy/the-true-cost-of-the-bank-bailout/3309/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-20http://en.wikipedia.org/wiki/University_of_Iowahttp://blogs.law.uiowa.edu/ebook/sites/default/files/Bailout_Plan_Outline.pdfhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-19http://online.wsj.com/article/SB122212648830465179.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-18http://en.wikipedia.org/wiki/Financial_Timeshttp://markets.ft.com/investmentBanking/tablesAndTrends.asp?ftauth=1372865806660http://en.wikipedia.org/wiki/Investment_banking#cite_ref-17http://www.economist.com/node/21562925http://en.wikipedia.org/wiki/Investment_banking#cite_ref-16http://www.thecityuk.com/assets/Uploads/Banking-2010.pdfhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-IFSL2010_15-3http://en.wikipedia.org/wiki/Investment_banking#cite_ref-IFSL2010_15-2http://en.wikipedia.org/wiki/Investment_banking#cite_ref-IFSL2010_15-1http://en.wikipedia.org/wiki/Investment_banking#cite_ref-IFSL2010_15-0http://www.finextra.com/news/fullstory.aspx?newsitemid=16436http://en.wikipedia.org/wiki/Investment_banking#cite_ref-14http://www.aba.com/ABASA/Pages/default.aspxhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-13http://www.fdic.gov/bank/analytical/banking/2001sep/article2.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-12http://www.goldmansachs.com/careers/why-goldman-sachs/our-divisions/finance/index.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-11http://www.goldmansachs.com/what-we-do/securities/prime-brokerage/risk-mgmt-and-financing.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-10http://www.barcap.com/client-offering/investment-banking.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-9http://careers.jpmorgan.com/student/jpmorgan/careers/us/business/financehttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-8http://careers.jpmorgan.com/student/jpmorgan/careers/europe/business/opshttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-7http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/riskmgmthttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-6http://en.wikipedia.org/wiki/The_Financial_Timeshttp://www.ft.com/cms/s/0/0fb16d54-de18-11df-88cc-00144feabdc0,dwp_uuid=eddfd4e0-4bc3-11da-997b-0000779e2340.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-IB_FT_5-0http://graphicsweb.wsj.com/documents/INVESTMENT/InvestmentBankQuarterly_1007.htmlhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-4http://digitalcommons.law.umaryland.edu/fac_pubs/937/http://en.wikipedia.org/wiki/Investment_banking#cite_ref-Rhee2010_3-1http://en.wikipedia.org/wiki/Investment_banking#cite_ref-Rhee2010_3-0http://gates.comm.virginia.edu/wjw9a/Papers/JACF%20Morrison%20Wilhelm%20Final%20version.pdfhttp://en.wikipedia.org/wiki/Investment_banking#cite_ref-Morrison_2-2http://en.wikipedia.org/wiki/Investment_banking#cite_ref-Morrison_2-1http://en.wikipedia.org/wiki/Investment_banking#cite_ref-Morrison_2-0


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sachs-the-cuomo-reports-bonus-breakdown/) The Wall Street JournalBlogs (July 30, 2009). Retrieved March 7,

2011

29. ^ "Morgan Stanley: The Cuomo Reports Bonus Breakdown" (http://blogs.wsj.com/deals/2009/07/30/morgan-

stanley-the-cuomo-reports-bonus-breakdown/) The Wall Street JournalBlogs (July 30, 2009). Retrieved March 7

2011

30. ^ abc Aaron Brown, review of "The Greed Merchants: How Investment Banks Played the Free Market Game" by

Philip Augar, Harper Collins, April 2005. Published in Global Association of Risk Professionals, March/April 05

Issue 23

31. ^ William D. Cohan, author ofHouse of Cards: How Wall St. Bankers Broke Capitalism, speaking on BBC RadioLive, Up All Night, 13 April 2011

32. ^ Nocera, Joe (March 9, 2013). "Rigging the I.P.O. Game"

(http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo-game.html?_r=0&pagewanted=all).

New York Times. Retrieved 14 March 2013.

33. ^ Salmon, Felix (March 11, 2013). "Where banks really make money on IPOs" (http://blogs.reuters.com/felix-

salmon/2013/03/11/where-banks-really-make-money-on-ipos/). Reuters. Retrieved 14 March 2013.

34. ^ abc Tom Randall and Jamie McGee, "Wall Street Executives Made $3 Billion Before Crisis (Update1)"

(http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGL5l6xOPEHc), Bloomberg, September 26, 200

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