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Investment Banking Essay

1476 words - 6 pages

Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert Shiller at Yale University

February 4, 2010

Investment Banking

The term bank is misleading since this is often used in everyday life

as a synonym for a depository institution. A depository institution is

an institution that accepts deposits from individuals and companies and

later on the owner can take the money back at an interest. Meanwhile the

institution makes loans, or invest the money at higher interest rates

than they give out on the deposits and that is how they make a profit

(e.g. a savings- ,savings and loan- or commercial bank).

Historically and at

present ...view middle of the document...

P. Morgan & Co decided to be a commercial bank. Two individuals that at this

time worked with the investment banking department, Henry S. Morgan and Harold Stanley,

then decided to open up Morgan Stanley, a new investment bank. Since 1933 J.P. Morgan has

gotten back into investment banking however and the companies are today competitors)

The problem was that in the US there was a division between

investment banking and commercial banking while in Europe there was not

which resulted in a lot of complaints from companies in the business

saying that the laws of the US handicapped them against there foreign

competitors. Finally part of the Glass-Steagall Act was repealed by the

Gramm-Leach-Bliley Act of 1999 (GLBA) which led to a wave of mergers

between investment banks, commercial banks and insurance companies, many

occurring just before the bill but were given waivers (e.g. The commercial

bank Citicorp merged with the insurance company Travelers Group to form the conglomerate


Financial Crisis of 2007-2010

Many of the investment banks buckled during the financial crisis. The

first to fail was The Bear-Stearns Companies, a global investment bank,

securities trading and brokerage firm until its collapse and fire sale

to JPMorgan Chase in 2008 (for $10 a share, a price far below the 52-week high of

$133.2. The Federal Reserve helped smooth the process by giving a $29bn line of credit to

JPMorgan in exchange for the promise that JPMorgan would buy Bear-Stearns. This

controversial decision by the Fed was made to minimize the contaminating effects of the

Bear-Stearns crash. Ironically Bear-Stearns was one of few firms that survived the 1929

Wall Street Crash without laying off a single employee).

The crisis saw the lat of

the US investment banks which hadn’t gone bankrupt or been acquired in a

bankrupt-like state convert to “bank holding companies” which are

eligible for emergency government assistance (the Troubled Asset Relief Program

Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert Shiller at Yale University

(TARP) is a program of the United States Government designed to purchase assets and

equity from financial institutions to strengthen the financial sector).

The Underwriting Process


Investment Banks

- Distribute the prospectus

Issuing Firm


Syndicate of Underwriters

Group of Sellers

One investment
bank is chosen
by the firm.

The lead-underwriter
chooses a syndicate
of underwriters.

Group of intermediaries
between issuer and

- SEC Registration Statements


- Meet with potential buyers
- Book promised sales
- Analyze feedback from brokers

- Credit ratings
- Legal approval
- Printing Securities


Final price is determined

Tombstone is published in newspapers

Single price is offered

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