Investment Banking

Investment banking is concerned with how and why money is moved from those who have it (investors) to those who need it (issuers). We work with the bankers with reference to research, preparing filings with the SEC and state security offices.

Investment banking is the sale and distribution of new offerings of securities, carried out by a financial intermediary (an investment banker), who buys securities from the issuer as principal, and assumes the risk of distributing the securities to investors. The process of purchasing and distributing securities is known as underwriting. The GLASS-STEAGALL ACT of 1933 prohibited commercial banks from underwriting securities, and required banks to sell their underwriting affiliates, because of abuses by some commercial bankers in selling securities to their own customers.

The GLASS-STEAGALL restrictions were finally removed by the GRAM-LEACH-BLILEY ACT of 1999, which authorized commercial banks to engage in investment banking activities through affiliated companies, underwriting commercial paper, corporate debt, and equity securities. The act also removed previous restrictions barring banks from underwriting municipal revenue bonds.

During the 1970s and 1980s, a number of forces converged to transform the face of finance. Among these were advances in financial theory, the development of a great number of new financial instruments, a more accommodative regulatory environment, the emergence of global competition, advances in technology, and a more volatile price environment. These developments, together with an increasing appreciation of mathematical and statistical tools, transformed finance from a descriptive discipline to an analytical one and, later, to an engineering science.

Financial engineering can be defined, broadly, as the development and the creative application of financial technology to solve financial problems, exploit financial opportunities, and to otherwise add value.1  In keeping with the traditional meaning of engineering, the work of modern investment bankers is often described as "structure solutions" or "structured finance." Without doubt, financial engineering is the lifeblood of financial innovation and a cornerstone of modern investment banking. This explains the many references to financial engineering that appear.

Technology and competition have caused a phenomenal decrease in both transaction cost and the cost of information. The cost of transacting for the institutional trader, who transact on a wholesale level, has dropped to 1/20th or less of levels prevailing 20 years ago. For retail traders, the drop has not been as great, but it has still been remarkable. What's more, an incredible array of new financial products - particularly futures, options and swaps - has made it possible to replicate or synthesize positions at such negligible cost that, in many cases, transaction costs can be reduced to less than 1/100th of the levels 20 years ago.