The financial crisis of 2008 brought the world of investment banking to the notice of the general public, but unfortunately, not in a good light. Names like Lehman Brothers and Goldman Sachs were in news almost daily for more than a year. Most of the news about them was bad – for example, that Lehman Brothers declared bankruptcy and closed. Others survived, but not as investment banks. However, even when all these multi-Billion dollar investment banks were in news, and it seemed as if civilization itself was in jeopardy, not many knew or completely understood what was it that they did.
Investment banking refers to services rendered by financial institutions, called investment banks, whereby these banks help other entities, including private companies and governments, raise money from the equity and bond market. For example, Facebook Inc was in news recently because the company wants to raise money from the equity market. To make an offer of its shares in the market, Facebook needs the services of an investment bank to take care of all the legal and technical paperwork required to make an Initial Public Offer (IPO). For its services rendered in the launch of the IPO, the bank will take a fee, which will likely run into tens of millions of dollars.
Apart from assisting companies, and governments, raise money from the equity and bond market, investment banks are also involved in a number of other financial and banking businesses. For example, one of the most profitable businesses for investment banks is the buying and selling of financial products, including shares and bonds, with the goal of making a profit on each trade. This business is called brokerage, and investment banks are very good at it. Indeed, before the 2008 financial crisis, the world’s largest brokerage company was an investment bank – Merrill Lynch. Merrill Lynch ceased to exist as a separate entity after it was bought by Bank of America.
Other businesses investment banks are involved in include asset management, prime brokerage, underwriting services, and giving mergers and acquisitions advice to companies. Though investment banks do not offer their services to the general public, they usually have many High Net Worth Individuals (HNI) as clients.
Top Investment Banks
The following are the top three investment banks in the world, when ranked based on the fees earned by them in the year 2010:
- J.P. Morgan Founded in 1871 by one of the financial giants of his time, the eponymous J P Morgan, it is a commercial as well as an investment bank. As an investment bank, it earned fees in excess of $5.5 Billion in 2010.
- Bank of America Merrill Lynch is the investment banking arm of Bank of America, and the direct descendent of the company known as Merrill Lynch. The latter was bought by the Bank of America during the financial crisis of 2008.
- Goldman Sachs was originally founded in 1869 by Marcus Goldman, who was joined by his son-in-law Samuel Sachs in 1882. Goldman Sachs was one of the key companies that helped create the IPO market in the early 20th century United States.
Investment banking refers to the business of helping companies raise money for their growth and functioning. Its importance in the proper functioning of the economy, and its growth, cannot be overstated. Every company needs money to grow, or to just survive, and investment banks help them do that by raising capital from equity and bond markets, as well as from private individuals and entities.