Investment Banking History in the 20th Century

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 “bulge bracket” 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. 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, financier Michael Milken popularized the use of high yield debt (also known as junk bonds) in corporate finance and mergers and acquisitions. This fueled a boom in leverage buyouts and hostile takeovers (see History of Private Equity). Filmmaker Oliver Stone immortalized the spirit of the times with his movie, Wall Street, in which Michael Douglas played the role of corporate raider Gordon Gekko and epitomized corporate greed.

Investment banks profited handsomely during the boom years of the 1990s and into the tech boom and bubble. When the tech bubble burst, it precipitated a string of new legislation to prevent conflicts of interest within investment banks. Investment banking research analysts had been actively promoting stocks to investors while privately acknowledging they were not attractive investments. In other instances, analysts gave favorable stock ratings to corporate clients in the hopes of attracting them as investment banking clients and handling potentially lucrative initial public offerings.

These scandals paled by comparison to the financial crisis that has enveloped the banking industry since 2007. The speculative bubble in housing prices along with an overreliance on sub-prime mortgage lending trigged a cascade of crises. Two major investment banks, Bear Stearns and Lehman Brothers, collapsed under the weight of failed mortgage-backed securities. In March, 2008, the Federal government began using a variety of taxpayer-funded bailout measures to prop up other firms. The Federal Reserve offered a $30 billion line of credit to J.P. Morgan Chase to that it could acquire Bear Sterns. Bank of America acquired Merrill Lynch. The last two bulge bracket investment banks, Goldman Sachs and Morgan Stanley, elected to convert to bank holding companies and be fully regulated by the Federal Reserve.

Moving forward, the recent financial crisis has weakened both the reputation and the dominance of U.S. investment banking organizations throughout the world. The growth of foreign capital markets along with an increase in pools of sovereign capital is changing the landscape of the industry.

The growing international flow of capital has also opened up opportunities for investment banking in new financial centers around the world, including those in developing countries such as India, China and the Middle East.

References:

Encarta.msn.com

http://seekingalpha.com

Investment Banking: Past, Present, and Future
by Alan D. Morrison, Saïd Business School, University of Oxford and
William J. Wilhelm, Jr., McIntire School of Commerce, University of Virginia

http://www.virtualwallstreet.netl
 

Bookmark and Share

Comments on this entry are closed.

Previous post:

Next post:

Real Time Web Analytics