Introduction to Investment Banking
We've decided the pleasant manner to begin this course is through providing you with a few ancient background approximately the investment banking enterprise records doesn't play a important position in many modern groups this isn't the case within the international of funding banking records name culture and reputation are some of the most treasured assets those organizations have an funding bank it really is been hooked up 200 years in the past has the connections partnerships and understanding permitting it to attract pinnacle tier customers and investors therefore it's far vital we apprehend how those companies operated within the first place and how their agencies evolved throughout the distance of time the principle drivers of trade we can have to have a look at are government rules and marketplace dynamics the goal of this section is to enable you to see the overall picture before studying the offerings offered with the aid of funding banks we will learn what led to the conception of those offerings in addition these are some of the most popular topics at investment banking interviews recruiters and enterprise practitioners will likely test your knowledge to determine whether or not you have a genuine hobby to paintings in their enterprise within the next lesson we will go back in time and examine who started offering investment banking offerings and why their function turned into so crucial for the boom of the US economy inside the nineteenth century [Music] this is an important piece of proof that records and tradition play a massive position in the world of Investment Banking the listing you notice here shows the names of the largest funding banks in the world Barclays Capital JP Morgan Citigroup Credit Suisse Goldman Sachs Deutsche Bank Merrill Lynch and Morgan Stanley the youngest of those banks is eighty years old but their average age is significantly higher one hundred and seventy years [Music] here's our first venture for you we've visible that some of the players inside the international of Investment Banking commenced working centuries ago please try to discover the oldest financial institution in the international and while it was founded funding-banking emerged in America in the nineteenth century while the American economy become growing so fast that industrial banks couldn't serve the enlargement of railroads mining companies and the heavy enterprise the primary hobby of investment banks is now known as safety underwriting they offered financial securities like bonds and stocks from an issuer and resold those securities to a set of investors we can say that funding banks served as a bridge between call for and offer among folks that had capital and desired to make investments it and people who wished financing for one in every of their projects the main customers that funding banks had in those early days have been government entities whilst those governments required financing they wished to trouble bonds and promote them to traders to try this they used the services of middlemen or funding bankers as we might name them today the government's did not have the knowledge to promote bonds on their personal they did not recognize how to fee them they were not unbiased in the negotiation of right phrases and character investors failed to think their interest might be protected without having a widespread bargaining strength this is how outstanding middlemen got here on the stage their role turned into to negotiate brilliant terms with the government through a fragment of the bonds that the government wants to offer and promote the bonds to final buyers there is one important element we shouldn't forget even though earlier than agreeing to distribute the authorities's bonds the middlemen contacted capability traders and created a listing with those who have been equipped to buy the bonds they had to be positive that they could resell all bonds issued and would not be stuck with any of those as you could imagine while an investor buys authorities debt they could have sorts of problems the authorities can default and forestall repaying its debt or it is able to try to renegotiate it it's why maximum investors felt more calm durable once they had an set up intermediary on their facet in 1842 eight American states defaulted due to the fact their economies relied heavily on the production of cotton and the fee in that 12 months changed into too low these states ought to now not pay off their loans and refused to do it which put at danger the capital of the traders who sold these securities the middlemen who organized this sale reacted in a decisive manner all the attempts of those states to elevate new capital were unsuccessful James Rothschild was quoted as saying to the representatives of the federal authorities you could inform your government which you have visible the man who's at the head of the finance seers of Europe and that he has informed you that they cannot borrow a greenback not a dollar the result of those actions changed into that the defaulted states agreed to a restructuring plan which happy the traders and repaid them their capital this episode proves how important investment bankers were in the nineteenth century such episodes increased their recognition which allowed them to paintings with top tier traders all issuers of debt and equity wanted to paintings with middlemen who may want to contact top-tier buyers we will conclude that investment banking offerings were born due to the fact they were wanted via both buyers and financed ears these so referred to as middlemen introduced to the table some thing very important their popularity the nice of a protection turned into related to the call of the funding banker who sold it to the market this aligned the desires of funding bankers and traders investors desired to maximize their returns whilst investment bankers wished to hold their traders happy and maintain their commercial enterprise in the years to come [Music] in this lesson we cited the Rothschild family and one in all its members distinguished middlemen like Rothschild paved the way for the investment banking enterprise and epitomized the first investment bankers humans with large have an impact on and a loyal purchaser base the Rothschild family is one in every of the historic powerhouses in funding banking let's learn a few interesting information approximately them the Rothschilds knew about Napoleon's defeat at Waterloo before the government they had a totally efficient community of couriers which allowed them to study approximately Napoleon's defeat a day before the government did Nathan Rothschild kept the secret to himself and immediately started out buying British government debt and for the reason that Napoleon became defeated the charges of British authorities bonds soared the very next day Nathan Rothschild should sell the bonds years later at a profit of 40% German emperor William become fascinated by using their fortress in France and said that Kings couldn't manage to pay for this it could only belong to a Rothschild Lord Walter Rothschild turned into a passionate zoologist and an immensely rich person he is well-known for riding a carriage of six zebras to Buckingham Palace Lord Walter wanted to prove that zebras may want to be tamed pretty cool right [Music] here is our next challenge for you so far we've mentioned the Rothschild circle of relatives attempt to do some studies and offer the names of three other households that formed investment banking dynasties and establish a number of the largest firms in the industry business versus investment banks at this point you may ask the following question whats up what about regular banks the types of banks that offer loan loans and take deposits from regular customers are not they the ones who should be handling investment banking operations and it would be a fair question the ordinary banks we see around us imparting loans to the population and gathering its financial savings are called commercial banks those are mainly worried with deposit taking credit giving activities these banks collect deposits from the populace and then lend the money to borrowers the distinction between the interest they pay to depositors and the one they charge borrowers is referred to as spread and this represents their most important supply of revenue I'm sure you will agree this is very extraordinary than investment banking operations the scale of those loans and the complexity of the operations are smaller it's far essential that you recognize the distinction among investment banking and business banking strains of services in our subsequent lesson we will learn about some banks that mixed both sorts of services under the equal roof [Music] goldman sachs is without a doubt the primary bank on Wall Street its staff is the highest-paid on average in 2006 personnel have been paid an average of six hundred and twenty-two thousand US greenbacks this parent is significantly influenced through the big compensation of the CEO and other partners of the firm however is still a stratospheric determine of course things change significantly after 2008 with the common income going down to three hundred and ninety nine thousand five hundred and six dollars consistent with employee for 2012 [Music] on this lesson we would love to mission you to call and describe the essential variations between the business model of a commercial and an investment bank as we anticipated in our previous lesson we can speak approximately the aggregate of business and funding banking offerings and why it creates anxiety among a few regulators first let's start with a definition banks that perform commercial and funding banking offerings are called Universal banks there are several monetary arguments why this aggregate makes sense many synergies exist among the forms of activities the primary gain being that Universal banks can sell more products to the identical consumer they could offer a one-stop save solution where everything is provided under the equal roof Universal banks can be a customers relied on adviser in times of ordinary business and when the employer should raise fairness or debt the gain is that they will have a near dating with the firm and will know its enterprise inside-out at the equal time there are good reasons the marriage among investment banking and business banking activities can be dangerous given that Universal banks have more records about their clients and that often their customers are additionally borrowers Universal banks may additionally be tempted to sell to the marketplace through investment banking services risky positions which are probably to cause losses this may be a success to their reputation however will prevent them from losing their very own cash due to these issues the glass-steagall Act changed into introduced within the u.S. In 1933 it prohibited business banks engagement in funding banking services commercial banks could not exchange and distribute securities sixty six years later the glass-steagall Act turned into repealed allowing banks to promote commercial and investment banking offerings beneath the identical roof this caused mergers and to the formation of worldwide financing conglomerates giants like HSBC JPMorgan Chase Bank of America and Deutsche Bank only a few of the historically hooked up names remained pure investment banks banks like Goldman Sachs Morgan Stanley and selected not to go into the industrial banking marketplace and continue to offer conventional funding banking services nowadays funding banks offer a complicated variety of monetary solutions their merchandise encompass a wide range of regions like underwriting of debt and equity advisory on mergers and acquisitions buying and selling and asset control it's miles understandable why underwriting and advisory are the two traditional sports that stand at the core of investment banking that is after all how the commercial enterprise commenced in the first location and how investment bankers add the maximum fee for their customers that is how they build historic relationships that last many years and even centuries sounds very romantic does not it buying and selling and asset control are the two other areas where investment banks are very lively historically there has been a considerable debate over the fact that a few comprise an intrinsic battle of interest as an example an funding bank may change stocks on its personal account or on behalf of its customers if the marketplace crashes which are the securities so as to be taken care of first the ones of the customers or the ones of the bank another trouble is that funding banks have research departments whose process is to have a look at shares and offer tips banks provide underwriting offerings it is highly possible that the opinion of a banks researcher would be influenced through the bank underwriting the given business enterprise's securities these situations constitute a huge trouble for the industry and it truly is why the so-called Chinese partitions have been created the position of Chinese walls is to create a barrier among distinct divisions whose interaction ought to cause a struggle of hobby customer records is confidential and cannot be shared with people from the identical firm who do no longer have an authorized get right of entry to to it we will look in depth at those issues inside the next segment of the direction where we'll offer a detailed description of the 4 foremost areas of investment banking activity see you there [Music] investment bankers ancient function changed into to be the trusted advisors of their clients the epitome for that is Sidney Weinberg Goldman Sachs longtime leader one of the maximum critical relationships he had turned into with Henry Ford the second while henry ford ii became president ford become the biggest private employer in america and it also had sizable operational and financial difficulties Weinberg changed into the trusted advisor that Henry wanted he helped him hire pinnacle-notch executives and flip around the organization as a praise for selected Goldman to run its IPO in 1956 this turned into the most important IPO inside the records of Investment Banking the IPO cemented Goldman as considered one of the top corporations on Wall Street