From the monthly archives:

July 2009

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.


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


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Investment banking practices such as extending credit to merchants date back to ancient times. In the 1600s, early investment institutions such as acceptance houses and merchant banks helped finance foreign trade and accumulated funds for long-term investments overseas.

The nineteenth century saw the rise of several prominent banking partnerships such as those created by Rothschilds, the Barings and the Browns. These firms had their origins in the Atlantic trade, financing the importation of commodities for European manufacturers and helping them export their finished products around the world.

In the United States, investment banking received a boost during the American Civil War. Syndicate banking houses sold millions of dollars worth of government bonds to large numbers of individual investors to help finance the war. This marked the first mass-market securities sales operation, a practice that continued later in the 1800s to finance the expansion of the transcontinental railroads.

The 1800s also saw the birth of some of the most famous firms in investment banking, many of which are still with us, in one form or another, 150 years later. The firm of J. P. Morgan played a major role in the corporate mergers of the era, such as the merger of U.S. Steel Corp and the Northern Pacific and Great Northern railroads. The firm grew to such size and prominence at the turn of the century that J.P. Morgan, the founder, is credited for “saving” Wall Street during the banking crisis of 1907 by allegedly locking top executives from major banks in his office until they hammered out a solution.

Goldman Sachs was founded in 1869 by German Jewish immigrants Marcus Goldman who later partnered with his son-in-law, Samuel Sachs. Goldman Sachs was among the pioneers of the initial public offering (IPO), and managed one of the largest IPOs at that time, for Sears, Roebuck and Company in 1906.

In the early twentieth century, investment banking expanded dramatically. One reason was an increase in the number of individuals who owned stock, something that resulted from the prosperous years after the First World War. However, the ensuing run-up in stock prices created an unsustainable bubble that finally collapsed with the Great Depression in 1929. The U.S. plunged into one of the worst depressions in history. More than 11,000 banks failed or merged, and a quarter of the population was out of work.

The excesses of that period and the many bank failures led to a flood of new regulations to protect investors from fraudulent stock promoters and stabilize the banking system. It led to the passing of the Federal Securities Act of 1933, which required “full disclosure” of accurate information for publicly offered securities and a prospectus filed with the Securities and Exchange Commission.

More importantly for investment banks, the government passed the Glass-Steagall Act in 1933, which compelled commercial banks to separate themselves from their securities distribution arms. Large universal banks such as JP Morgan, for instance, split into separate entities. In JP Morgan’s case, it created JP Morgan as a commercial bank, Morgan Stanley as an investment bank, and Morgan Grenfell, as a British merchant bank. The Glass-Steagall Act remained in force until it was repealed during the Clinton administration in 1999.

Next time, we’ll look at Golden Era of Investment banking in the 20th century, as well as current  trends.

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The intensity of working in investment banking isn’t for everyone. The pace of work in investment banking can be particularly difficult on women, who may want to start a family when they reach their 30’s. Many bankers leave after a few years to go into related fields such as management consulting or corporate finance.

Some large firms such as Goldman Sachs, J.P. MorganChase and Deutsche Bank have launched return-to-work programs to lure back senior executives who left investment banking due to work-life pressures. These programs offer a reduced work week and less travel (and reduced compensation), in an effort to tap into the experience and maturity of mid-level employees who initially left the industry.

Bottom line: yes, the money is attractive. But the demands of an investment banking job and the pace of the business are way too extreme if you go into it just for the money. To thrive in investment banking, you need to like the work itself, the number crunching, the digging for facts on a particular company, political jockeying within the firm, and the high octane environment of working with a pack of alpha males.

You’ll need topnotch analytical abilities, great people skills, stamina and a bit of luck to make a career of it. Not to mention the patience to put your personal life on the back burner for a few years. If all this sounds appealing to you, then investment banking might be the right choice.

For a more cynical and often humorous look at life inside investment banking, check out

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Investment Banking Job Culture

July 20, 2009

The investment banking culture has long been viewed as a macho, testosterone-fueled world where working 100-hour weeks and pulling all-nighters before a deal were commonplace. Analysts would brag about going home only to change their clothes. The payoff, in many cases, are enormous. Starting salaries and bonuses easily top $100,000. Incomes are two to three […]

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More Tools to Help Your Investment Banking Job Search

July 15, 2009

BLOGS AND ONLINE COMMUNITIES ASSOCIATIONS The National Investment Banking Association represents 26 years of experience as a not-for-profit trade association of national, regional and independent broker dealers, investment banking firms, investment advisors, and related capital market service providers. EVENTS There are a multitude of investment banking evens around the world, […]

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Tools to Help Your Investment Banking Job Search

July 13, 2009

ONLINE RESOURCES The Investment Banking Institute is recognized as the financial education and training leader, offering an accelerated career path for current finance professionals and all individuals seeking to enter the finance industry. IBI conducts more individual programs in more cities than any other firm. Last year alone (2008) they held over 700 sessions worldwide […]

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Tips for Working with Recruiters

July 8, 2009

When you have identified one or two recruiters with whom you would like to build a long-term relationship, it’s important to follow a few best practices to get the most out of the experience. 1) Respect the recruiter. Do not send your resume to the same company that your recruiter is contacting on your behalf. […]

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