Investment bank

Investment banks assist corporations in raising funds in the public markets (both equity and debt).

They may sometimes be confused with brokerages, which are firms which assist people in choosing and buying stocks, bonds, and mutual funds. (Of course, it is possible for a brokerage and an investment bank to share common ownership, and most of the largest brokerage companies also do investment banking.)

The tools of investment banking

Investment banks can invest money on stock markets or use advanced products called derivatives. Investment banks can also invest money directly into companies, projects, etc., either as direct investments for which they carry the full risk (known as private equity, venture capital, or merchant banking), or as loans with collaterals to reduce risks. Combinations of derivatives and loans also exist, such as mezzanines.

The main activities and units

Investment banks will typically be concerned with several business units, including Corporate Finance (concerned with managing the finances of corporations, including mergers, acquisitions and disposals), often called the Investment Banking Division of the firm; Research (concerned with investigating, valuing, and making recommendations to clients--both individual investors and larger entities such as hedge funds and mutual funds--regarding shares and corporate and government bonds); and Equities or Sales and Trading (concerned with buying and selling shares both on behalf of the bank's clients and sometimes also for the bank itself). Management of the bank's own capital, or Proprietary Trading, is often one of the biggest sources of profit; for example the banks may arbitrage in huge scale if they see a suitable opportunity and/or they may structure their books so that they profit from a fall of bond yields (a rise of bond prices).

Possible conflicts of interest

Because potential conflicts of interest may arise between different parts of a bank, the 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 which prohibits communication between Investment Banking on one side and Research and Equities on the other.

These are some of the conflicts of interest involved in investment banking:

• The fact that most stock research companies (companies which are supposed to do research on a business and tell investors to buy or sell a company) are owned by investment banks can create a large conflict of interest. Historically, many investment banks seeking to be allowed to underwrite a companies IPO or debt offering have said to that company that they would tell their research division to rate that company a buy, in order to convince them to do a deal. Most observers allege that during the bull market of the 90's this would occour with almost every deal. The companies would choose the investment bank who had a large research division which would rate them a "buy", because that would likely increase the stock price of the company, which would increase the amount of money made by the companies CEO's since they were primarily paid by stock options, meaning they make more money the higher the stock price goes.

• The fact that many investment banks also own retail brokerages, can cause a conflict of interest. Besides the research division rating the stock a buy, the Investment bank may tell its brokers to try and convince their customers to buy the stock as well. This would occur not only as a thing to clinch the deal, but may also occour when the company might be performing badly and the Investment Bank might have a large supply of stock in its inventory. The investment bank can instruct the retail stock brokers to tell clients to buy the stock, so that the investment bank can get the poor performing stock off its hands.

National and International public investment banking

In the United States, the Glass-Steagall Act prohibited banks from offering both commercial and investment services. The Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act in 1999. In part this was due to the tendency of the U.S. Congress to act itself as an investment bank: Lester Thurow claimed in the 1980s that it served exactly this function, advancing specific industrial policy and agricultural policy by direct grants or subsidies, loan guarantees, and exemption from regulations, taxes or other government-controlled expenses that would otherwise apply. This fusion of the banking and oversight role with fiscal policy was thought to be undesirably political, but inevitable if the US had no large investment banks.

Various international development organizations, either global (such as The World Bank), or regional (such as the European Investment Bank, nor to be confused with the European Central Bank), and also various central banks, are considered by most economists to be investment banks, as they can bolster or create currency for specific projects. Banking overlaps with monetary policy at this largest scale.

Players

Some of the major global private investment banks include:

• ABN Amro
• Barclays Capital
• Bear Stearns
• BNP Paribas
• Brown Brothers Harriman
• Citigroup
• Credit Suisse First Boston
• Deutsche Bank
• Dresdner Kleinwort Wasserstein
• Goldman Sachs
• JPMorgan Chase
• Lazard
• Lehman Brothers
• Merrill Lynch
• Morgan Stanley
• SG Cowen
• Thomas Weisel Partners
• UBS

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See also: Bank