Example Of Essay On The History Of Investment Banks
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Analysis of the banking systems of different countries shows that, in parallel with the development of the universalization of the growing trend towards specialization of commercial banks. In countries with developed market economies, including those which have a universal structure of the credit system, important places (despite a slight decline in their number) occupy specialized banks. Of these, the most interesting are the investment banks and credit institutions with specific tasks associated with the implementation of national interests.
It is considered that the investment banks emerged in the early 20th century, but the company, which they were later appeared much earlier - in the 1850-60 biennium. One of the first investment bank Lehman Brothers was founded in 1850, a Goldman Sachs - in 1869. The emergence of investment banking houses are usually the continuation of the practice of private banks (private banks), which carried out a subscription to corporate bonds and equities, engaged in attracting deposits, transactions with securities, investment and the creation of trust funds. To implement these activities, some of them created a distribution network nationwide. Clients of private banks were wealthy individual investors (Fleuriet, M., 2008).
Along with private banks, commercial banks were exist, whose activity has been associated with short-term lending to companies and who, banking act of 1864, it was formally forbidden to carry out transactions in the stock market due to significant fluctuations and high risks.
According to Cartwright, S. (2006), in the first two decades of the 20th century, the role of the stock market as a source of investment resources has increased significantly and began to attract more attention from the commercial banks, which together with some private banks have a significant impact on the trend in interest rates and market conditions. At this time, commercial banks began to actively establish branches, engaged subscribe for securities and stock market transactions. Formally, they are not owned by banks, but the latter provided them with the tools necessary to turn, and actually control their activities. Stimulus to the development of this direction was interested in attracting commercial banks through the issuance of bonds and trade wealthy investors, traditionally served by private banks.
The growth of the bond market was accompanied by the emergence of new issuers, both American and foreign. Foreign bonds placed in the US market and denominated in US dollars, are called Yankee bonds (bonds Yankees). Among the issuers of these securities were states (UK, Germany, Latin America), and private companies. Many companies receive funding through these bonds were extremely unreliable. Underwriters of these issues were investment banks that were supposed to be responsible for the reliability of the issuer, but in reality they are not subjected to due diligence. Commercial banks gave loans for bond trading, when depositing in the account for 10-15% of the transaction, which created a great opportunity for speculation. Subsequently, numerous violations were revealed by bank officials who practiced the use of bank loans for speculative operations with its own securities, the withdrawal of funds for personal use and non-payment of loans provided to subsidiaries (DePamphilis, D, 2008).
The Structure of Investment Banks
Front office. Investment banking services (investment banking) This is a traditional department for the bank, where customers help to raise funds in the capital markets and advise on mergers and acquisitions. The work in this department is very prestigious and well paid for it, however, it is very difficult to get into. Investment bankers generally work 80-100 hours a week, ending after midnight, often staying up in the morning. This kind of work is related to the nature of the transactions in which it is necessary to respond quickly to change in the course of the transaction within the already heightened urgency.
Securities trading. This type of activity is defined as an external view of the possibility to sell directly brokerage services, i.e. services for buying and selling securities. At the same time, the activities of securities trading also performed as a tool for investment banking (selling securities to be placed) and asset management (buying and selling securities in the restructuring of the securities portfolio). At the same time in developed financial markets by trading in securities is understood not simply the process of transactions of purchase / sale of securities, and the implementation of complex trading and arbitrage strategies, as consisting of a number of simple transactions of purchase / sale, so the more complex transactions (Rosenbaum, J., 2009).
Mergers and acquisitions for the investment bank operating in the country with a developed financial market, often become the main sources of profit. The activities of an investment bank during mergers and acquisitions can be subdivided into the following components:
• consulting activities to identify the optimal variant of the restructuring of the business;
• raising funds for the implementation of mergers and acquisitions;
• accumulation in the market of large blocks of shares at the request of the client (buy large stakes), sales of large blocks;
• restructuring of individual companies and the sale of its parts;
• Development and implementation of effective protection of customer acquisition.
Investment Management (or asset management) - the so-called management may trade instruments and other assets on behalf of an investor who makes them specific goals for profitability. Investors can be both companies (insurance companies, pension funds, corporations) and private investors.
The Difference between Investment Banks and Other Bank Types
This difference is determined through the uniqueness of their functions.
Investment banks are special credit institutions engaged in financing and investment lending. These banks are specific banking institutions, which are connected with the peculiarities of loan market, as well as the peculiarities of the banking legislation of certain industrialized countries in which commercial banks are forbidden to engage in investment activity 9 Harwood, I., 2006).
In developed countries, investment banks provide their customers with the following basic services:
• attraction of financial resources;
• services for business restructuring through mergers and acquisitions;
• brokerage services;
• portfolio management services;
• depository and custodial services;
• providing advice to clients.
1. Attracting financial resources. The essence of this service is as follows. Client Investment Bank needs to obtain financial resources for an extended period of time (for the reconstruction of the company or to develop a new type of business, or for the construction of a new enterprise). Since this client is not engaged in professional activities in the financial market, he seeks the help of an investment bank. Investment Bank helps the client to attract financial resources, i.e. developing mechanisms and tools to attract financial resources, is finite investors and intermediaries, etc.
2. Business restructuring through mergers and acquisitions of companies. In a developed market economy, the economic entities from time to time there are crises associated with the mismatch in size and structure of the market requirements. In this case, the owners of capital may decide to withdraw from a particular market or the connection of the capital with other capital, or they want to buy a company that is, or is their competitor, or produces the products they need. In order to absorb a foreign company, in most cases need to buy a controlling stake in its shares. Since these operations are mainly specialized investment banks, customers turn to them. Investment banks using their proven technologies perform such orders.
This type of service for Russian conditions while less relevant than other services of investment banks.
3. Brokerage Services. Investment banks provide and ordinary brokerage services, i.e. Services for the purchase or sale of securities for the account and on behalf of the client.
Big banks brokerage brings a relatively small share of total income. However, the provision of high-quality brokerage services - the first step to attract new customer that wants to go further from the consumption of brokerage services to consume services portfolio management. In addition, the level of unit costs for execution of brokerage orders significantly reduced the growth of the total turnover of securities, so the big investment banks have a high enough return on brokerage.
4. Portfolio management services. Client Investment Bank, which has a certain amount of free financial resources, can place these resources in the financial market. He can place them on their own, referring to the investment bank as a broker and using his recommendations or trust arrangement and the subsequent management of resources investment bank. In the latter case, there is a service for financial management of the client. The investment bank not only sells or buys securities and other financial assets on behalf of a client (which is the case in the implementation of brokerage) and manages the financial resources at its sole discretion, with the aim to maximize the client's income.
5. Depository custodian services. The investment bank also provides its customers with storage services, guardianship, trusteeship, securities accounting clients. In most cases, these services are provided in conjunction with the broker (but not necessarily brokerage services are provided in conjunction with the depository and custodian). In this case, the investment bank buys for the customer on his order (acting as a broker) share and registers it in the register in his name as nominee (acting as custodian in relation to the client).
6. Provide advice to the client. Providing the client with recommendations often cannot be considered as a separate service. In most cases, the provision of advice is present as part of the services, such as fundraising, business restructuring, brokerage, portfolio management. The client is most interested in the recommendations of the investment bank is accessed as a broker. In this case, the broker recommends to the client which securities makes sense to buy and what to sell, provides an analytical overview of the market, a detailed study of the potential of the investee.
As was written by Straub, T., (2007), the main function of investment banks in the United States is the emission function, i.e., negotiating with entities on the issue of new shares and bonds, technical training such issues and the adoption of a commitment to offering of securities in the market and purchase their own expense that their shares, which will not be placed on the market. Thus, in the US there is a clear legal distinction between commercial and investment banks. In European industrialized countries, such a clear distinction does not exist. In the UK, investment operations have traditionally engaged in commercial banks. In France, financing and crediting of capital investments carried out special credit institutions, among them the leading place belongs to the bank "National Credit." In Germany, investment banks as independent institutions have not been spread. Here the banks in their activities carried out both short and long-term (investment) transactions. In Japan, the issuance of long-term loans carries both public and private banks.
Negative Effect of High Bonuses
As it known, in the latest report on global financial stability IMF estimated payment management, corporate governance and risk-taking in the largest banks in the world, and in addition, recommended measures to adopt only reasonable risks. While a number of quantitative and qualitative factors contributed to the global financial crisis, the report says that the structure of wages leaders encouraged bankers to make short-sighted steps that led to the long-term negative consequences. The reasons that the banks have taken such risks were many and complex, but experts in the financial sector, the public sector and the scientific sector agree that the structure of incentives in some financial institutions also played an important role. Another reason for the reckless risk was weak regulatory framework, as well as boards of directors, which were dependent on the banking (Rhee, R., 2010).
IMF proposes a series of reforms for banks, especially regarding changes option compensation: the higher payments that relate to long-term results of labor, associated with less risk. Moreover, the banks that have a large institutional property tend to take fewer risks. As expected, the strong periods of financial stress negate these effects, because the compensation changed when the bank is close to default.
According to the IMF that the banks should be guided by a promising approach in its operations, it was noted in the position that bonuses should be paid in the form of long-term bank bonds. It's like a child who receives savings bonds from the grandparents as a gift for his birthday: a promise of money in the future - it's great, but he does not feel joy, which would be, if he got the most popular toy.
The most controversial measure is a stipulation for the return of your bonuses in special cases, which means that managers will have to return part of the previously paid bonuses if their decisions later will have long term negative effects. Thus, the IMF hopes that managers will take investment risks, which are necessary for the favorable development of the bank, but only on condition that risk-taking is associated with favorable long-term effects, but not with quarterly payments.
Especially the IMF is concerned that some managers can use impressive short-term indicators, in order to climb the career ladder in another place, while the left bank soon expects unpleasant surprises. In addition, the IMF has proposed changes to the structure of the board of directors, particularly emphasizing the fact that the chairmen of the Board of Directors must be independent of management. This question has recently been raised against the head of JPMorgan Chase, Jamie Dimon, who served as head of the company, and was chairman of the board of directors.
The Board of Directors must be independent of management. Boards should establish a Committee on risk assessment, to improve internal controls over risks. In addition, it is necessary to evaluate the pros and cons of what the board of directors represented creditors.
Fleuriet Michel Investment Banking Explained: An Insider's Guide to the Industry Mc Graw-Hill New York NY 2008 ISBN 978-0-07-149733-6
Cartwright, Susan; Schoenberg, Richard (2006). "Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities". British Journal of Management 17 (S1): S1–S5. doi:10.1111/j.1467-8551.2006.00475.x.
DePamphilis, Donald (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press. p. 740. ISBN 978-0-12-374012-0.
Rosenbaum, Joshua; Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. ISBN 0-470-44220-4.
Harwood, I. A. (2006). "Confidentiality constraints within mergers and acquisitions: gaining insights through a 'bubble' metaphor". British Journal of Management 17 (4): 347–359. doi:10.1111/j.1467-8551.2005.00440.x.
Straub, Thomas (2007). Reasons for Frequent Failure in Mergers and Acquisitions: A Comprehensive Analysis. Wiesbaden: Deutscher Universitätsverlag. ISBN 978-3-8350-0844-1.
Williams, Mark T. (March 2010). "Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System". Mcgraw-Hill.
Scott, Andy (2008). China Briefing: Mergers and Acquisitions in China (2nd ed.).
Rhee R. (2010). The Decline of Investment Banking: Preliminary Thoughts on the Evolution of the Industry 1996–2008. Journal of Business and Technology Law.
Jagger, Suzy (September 22, 2008). "End of the Wall Street investment bank". The Times (London). Retrieved March 7, 2011.
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