19. Investment Banks

YaleCourses・2 minutes read

Investment banking involves assisting businesses in creating securities like stocks and bonds, with a focus on enabling corporations to achieve goals and secure funds. The financial industry post-crisis remains stable, with opportunities in banking, private equity, hedge funds, and venture capital, emphasizing the importance of taking risks for personal and professional growth.

Insights

  • Investment banking involves assisting businesses in creating securities like stocks and bonds, acting as consultants to help companies raise funds and strategize, focusing on trust-building and reputation, with a historical context of Morgan Stanley's formation after J.P. Morgan's decision to opt for commercial banking.
  • Regulations like Glass-Steagall and subsequent acts like Dodd-Frank aimed to address the impact of the financial crisis, affecting the landscape of investment banking, with the Volcker Rule prohibiting proprietary trading and the Lincoln Rule impacting banks like Goldman Sachs, while investment banking remains a robust industry post-crisis, offering various career paths beyond traditional banking roles.

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Recent questions

  • What is investment banking?

    Investment banking involves creating securities for businesses.

  • What is the Glass-Steagall Act?

    The Glass-Steagall Act regulated banking activities in the US.

  • What is the Volcker Rule?

    The Volcker Rule prohibits certain activities at commercial banks.

  • How did the Dodd-Frank Act impact investment banking?

    The Dodd-Frank Act aimed to regulate shadow banking and alter the investment banking landscape.

  • What are the career opportunities in finance?

    Finance careers offer avenues like investment banking, private equity, hedge funds, and venture capital.

Related videos

Summary

00:00

Insights into Investment Banking and Underwriting

  • Investment banking is distinct from commercial banking, with a guest, Jon Fougner, sharing insights from his experience in the field.
  • Investment banking involves assisting businesses in creating securities like stocks and bonds.
  • Investment bankers often act as consultants, aiding companies in raising funds and strategizing beyond mere share issuance.
  • Investment bankers differ from traders by focusing on enabling corporations or governments to achieve their goals and securing the necessary funds.
  • Pure investment banks do not accept deposits, unlike commercial banks.
  • Pure investment banks engage in underwriting securities, managing the issuance of new shares for companies.
  • Underwriting can involve IPOs for private companies going public or seasoned offerings for existing public companies issuing more shares.
  • Two types of underwriting deals are bought deals, where the bank buys and resells shares, and best efforts offerings, where the bank tries to place the offering without buying shares.
  • The Securities and Exchange Commission regulates the methods used by investment banks in underwriting securities.
  • Investment banking revolves around trust-building, solving moral hazard issues, and emphasizing reputation and loyalty, as exemplified by Goldman Sachs' principles and practices.

18:15

Evolution of Banking Regulations and Practices

  • In 1933, J.P. Morgan had to choose between investment banking and commercial banking, opting for commercial banking and subsequently firing all investment bankers.
  • The fired investment bankers regrouped to form Morgan Stanley, with Stanley being a Yale graduate and Morgan being the grandson of J.P. Morgan who died in 1911.
  • The Glass-Steagall Act was repealed in 1999 by the Gramm-Leach-Bliley Act, allowing commercial and investment banks to engage in similar business activities.
  • Following the financial crisis, debates arose on whether the repeal of Glass-Steagall contributed to the crisis, with some advocating for a return to its regulations.
  • Glass-Steagall was unique to the United States, with other countries practicing universal banking, combining investment and commercial banking.
  • The Volcker Rule, part of the Dodd-Frank Act, prohibits proprietary trading at commercial banks and ownership of hedge funds or private equity funds.
  • The Lincoln Rule, also in Dodd-Frank, prohibits swap dealers from accessing the Fed window, impacting banks like Goldman Sachs.
  • Lehman Brothers, a shadow bank, went bankrupt in 2008 due to heavy investments in subprime securities financed through the repo market.
  • Dodd-Frank regulations aimed to prevent another financial crisis by regulating shadow banking and altering the landscape of investment banking.
  • Investment banking remains a significant industry, with the United States, Europe, and Asia playing crucial roles, showing signs of stability and prosperity post-crisis.

36:25

Transitioning from Banking: Private Equity, Tech, Opportunities.

  • Analysts often transition from banking to private equity, hedge funds, or pursue an MBA, with a small percentage staying in banking long-term.
  • During a private equity boom, analysts were heavily recruited months in advance, with commitments made early.
  • The speaker chose to work in tech over private equity, spending the last three and a half years at Facebook.
  • Investment banking involves advising CEOs and CFOs on financing, mergers, and acquisitions.
  • Analysts in investment banking focus on building financial models, often working late hours to perfect them.
  • Accuracy is crucial in creating financial models and pitch books to secure business deals.
  • Investment banking teams are lean, typically consisting of an analyst, associate, VP, and MD.
  • Investment banking demands long hours and constant availability, even at senior levels.
  • Taking on responsibilities in investment banking can lead to more opportunities and learning experiences.
  • Investment banking continued despite the financial crisis, with other avenues like private equity, hedge funds, and venture capital also available for finance careers.

48:37

Early Career Risks Lead to Financial Success

  • Encourages taking risks early in careers to increase personal income and GDP insurance.
  • Suggests considering Finance for Idealists as a potential career option.
  • Recommends courses in math, probabilities, stats, econometrics, Excel modeling, computer science, and programming for success in finance.
  • Highlights the value of psychological inventories like Myers-Briggs and Strengths Finder for self-awareness and articulating strengths to employers.
  • Advises utilizing Career Services on campus but also exploring job opportunities beyond to avoid competition.
  • Recommends reaching out to professors and alumni for career advice and opportunities.
  • Encourages cold calling and emailing for job opportunities and being persistent.
  • Mentions the use of third-party recruiters by large asset management firms for talent acquisition.
  • Discusses the importance of building meaningful business relationships and networking for success in business.
  • Shares personal experience transitioning from investment banking to tech industry, emphasizing the importance of rigorous thinking and adaptability.

01:01:05

Facebook Partner: From Startup to Benchmark Partner

  • Early employee at Facebook took time off for startups, finished degree, now partner at Benchmark
  • Facebook's core values focus on users and user experience
  • Maniacal focus on serving core constituency, similar to Goldman Sachs
  • Facebook emphasizes serving users, partners, advertisers, and ecosystem
  • Facebook operates with a focus on creativity and moving fast to innovate
  • Business people at Facebook need to understand core mission, feasibility, and bring rigorous analysis
  • Importance of statistical experiments in business world
  • Continuous learning through graduate school, workplace challenges, and structured tools like Meyers-Briggs and Strengths Finder
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