Editing Investment banking

{{Short description|Type of financial services company}}
{{Worldwide|date=December 2022}}
{{Financial market participants}}
{{Banking |banks}}
'''Investment banking''' is an advisory-based [[financial service]] for institutional investors, corporations, governments, and similar clients. Traditionally associated with [[corporate finance]], such a bank might assist in raising [[financial capital]] by [[underwriting]] or acting as the client's [[Agency law|agent]] in the [[Issuer|issuance]] of debt or equity [[Security (finance)|securities]]. An investment bank may also assist [[Company|companies]] involved in [[mergers and acquisitions]] (M&A) and provide ancillary services such as [[Market maker|market making]], trading of [[Derivative (finance)|derivatives]] and [[Share capital|equity securities]] FICC services ([[fixed income]] instruments, [[Foreign exchange market|currencies]], and [[Commodity|commodities]]) or research (macroeconomic, credit or equity research). Most investment banks maintain [[prime brokerage]] and [[asset management]] departments in conjunction with their [[Securities research|investment research]] businesses. As an industry, it is broken up into the [[Bulge Bracket]] (upper tier), [[Bulge Bracket#Middle Market|Middle Market]] (mid-level businesses), and [[Boutique investment bank|boutique market]] (specialized businesses).

Unlike [[commercial bank]]s and [[retail bank]]s, investment banks do not take [[deposit account|deposits]]. The revenue model of an investment bank comes mostly from the collection of fees for advising on a transaction, contrary to a commercial or retail bank. From the passage of [[Glass–Steagall Act]] in 1933 until its repeal in 1999 by the [[Gramm–Leach–Bliley Act]], the [[United States]] maintained a separation between investment banking and commercial banks. Other industrialized countries, including [[G7]] countries, have historically not maintained such a separation. As part of the [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] of 2010 (''Dodd–Frank Act of 2010''), the [[Volcker Rule]] asserts some institutional separation of investment banking services from commercial banking.<ref>{{Cite web |url=http://www.investopedia.com/terms/i/investment-banking.asp |title=Investment Banking Definition |work=[[Investopedia]] |publisher=Dotdash |date=19 November 2008 |language=en-US |access-date=5 August 2016 |archive-date=21 October 2021 |archive-url=https://web.archive.org/web/20211021200703/https://www.investopedia.com/terms/i/investment-banking.asp |url-status=live }}</ref>

All investment banking activity is classed as either "sell side" or "buy side". The "[[sell side]]" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.). The "[[buy side]]" involves the provision of advice to institutions that buy investment services. [[Private equity]] funds, [[mutual fund]]s, [[life insurance]] companies, [[unit trust]]s, and [[hedge fund]]s are the most common types of buy-side [[Legal entity|entities]].

An investment bank can also be split into private and public functions with a [[Chinese wall|screen]] separating the two to prevent information from crossing. The private areas of the bank deal with private [[insider information]] that may not be publicly disclosed, while the public areas, such as stock analysis, deal with public information. An advisor who provides investment banking services in the United States must be a licensed [[broker-dealer]] and subject to [[U.S. Securities and Exchange Commission]] (SEC) and [[Financial Industry Regulatory Authority]] (FINRA) regulation.<ref>{{Cite web|url=https://www.sec.gov/info/smallbus/hmakens.pdf|title=U.S. Securities and Exchange Commission|access-date=2017-09-01|archive-date=2021-10-21|archive-url=https://web.archive.org/web/20211021032423/https://www.sec.gov/info/smallbus/hmakens.pdf|url-status=live}}</ref>

==History==
===Early history===
The [[Dutch East India Company]] was the first company to issue [[Bond (finance)|bonds]] and [[Share (finance)|shares]] of [[stock]] to the general public. It was also the first [[publicly traded company]], being the first company to be publicly [[Listing (finance)|listed]].<ref>{{cite book |last1=Cross |first1=Frank B. |last2=Prentice |first2=Robert A. |title=Law and Corporate Finance |publisher=Edward Elgar Publishing Ltd. |date=2007 |isbn=978-1847201072 |page=130}}</ref><ref>{{cite web |url=https://www.cscollege.gov.sg/Knowledge/Pages/Hub-Cities-London.aspx |title=Hub Cities — London: Why did London lose its preeminent port hub status, and how has it continued to retain its dominance in marine logistics, insurance, financing and law? |publisher=[[Civil Service College Singapore]] |last=Wu |first=Wei Neng |date=26 February 2014 |access-date=21 November 2017 |archive-date=8 March 2021 |archive-url=https://web.archive.org/web/20210308234412/https://www.cscollege.gov.sg/Knowledge/Pages/Hub-Cities-London.aspx |url-status=dead }}</ref>

===Further developments===
{{See also|History of investment banking in the United States}}
Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.e. [[initial public offering]]s (IPOs) and [[secondary market offering]]s, [[brokerage firm|brokerage]], and mergers and acquisitions, and evolving into a "full-service" range including [[securities research]], [[proprietary trading]], and [[investment management]].<ref>{{cite journal |first=Andrew F. |last=Tuch |url=https://www.hblr.org/wp-content/uploads/sites/18/2018/09/Tuch-2.pdf |title=The Remaking of Wall Street |journal=Harvard Business Law Review |pages=316–373 |volume=7 |access-date=2019-06-19 |archive-date=2020-12-03 |archive-url=https://web.archive.org/web/20201203222402/http://www.hblr.org/wp-content/uploads/sites/18/2018/09/Tuch-2.pdf |url-status=live }}</ref> In the 21st century, the SEC filings of the major independent investment banks such as [[Goldman Sachs]] and [[Morgan Stanley]] reflect three product segments:
# investment banking (mergers and acquisitions, advisory services, and securities underwriting),
# asset management (sponsored investment funds), and 
# trading and principal investments (broker-dealer activities, including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).<ref name=Rhee2010>{{cite journal |last=Rhee |first=R. J. |date=2010 |url=http://digitalcommons.law.umaryland.edu/fac_pubs/937/ |title=The Decline of Investment Banking: Preliminary Thoughts on the Evolution of the Industry 1996–2008 |journal=Journal of Business and Technology Law |pages=75–98 |access-date=2013-01-11 |archive-date=2021-11-02 |archive-url=https://web.archive.org/web/20211102114341/https://digitalcommons.law.umaryland.edu/fac_pubs/937/ |url-status=live }}</ref>

In the United States, commercial banking and investment banking were separated by the [[Glass–Steagall legislation|Glass–Steagall Act]], which was repealed in 1999. The repeal led to more "[[universal bank]]s" offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions and hiring. Notable full-service investment banks with a significant investment banking division (IBD) include [[JPMorgan Chase]], [[Bank of America]], [[Citigroup]], [[Deutsche Bank]], [[UBS]] (Acquired [[Credit Suisse]]), and [[Barclays]].

After the [[2008 financial crisis]] and the subsequent passage of the ''Dodd-Frank Act of 2010'', regulations have limited certain investment banking operations, notably with the Volcker Rule's restrictions on proprietary trading.<ref name=Morrison>{{cite journal |last1=Morrison |first1=A. D. |last2=Wilhelm |first2=W. J. |date=2007 |url=http://gates.comm.virginia.edu/wjw9a/Papers/JACF%20Morrison%20Wilhelm%20Final%20version.pdf |title=Investment Banking: Past, Present, and Future |journal=Journal of Applied Corporate Finance |volume=19 |number=1 |pages=42–54 |doi=10.1111/j.1745-6622.2007.00124.x |s2cid=153324348 |access-date=2013-01-10 |archive-date=2020-10-31 |archive-url=https://web.archive.org/web/20201031130731/https://gates.comm.virginia.edu/wjw9a/Papers/JACF%20Morrison%20Wilhelm%20Final%20version.pdf |url-status=dead }}</ref>

The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as 1960, 70% of [[Merrill Lynch]]'s revenue was derived from transaction commissions while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network.<ref name=Morrison />

==Organizational structure==

===Core investment banking activities===
Investment banking is split into [[Front office (finance)|front office]], [[middle office]], and [[back office]] activities. While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side advisory firms such as [[boutique investment bank]]s and small broker-dealers focus on niche segments within investment banking and sales/trading/research, respectively.

For example, [[Evercore|Evercore (NYSE:EVR)]] acquired ISI International Strategy & Investment (ISI) in 2014 to expand their revenue into research-driven equity sales and trading.<ref>{{Cite web |title=EX-99.1 |url=https://www.sec.gov/Archives/edgar/data/1360901/000119312514292346/d768829dex991.htm |access-date=2024-02-28 |website=www.sec.gov}}</ref>

Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, a highly regulated process by the SEC to ensure transparency is provided to investors. Therefore, investment bankers play a very important role in issuing new security offerings.<ref name=Morrison /><ref>{{Cite web |title=Going Public |url=https://www.sec.gov/education/capitalraising/goingpublic |access-date=2024-02-28 |website=SEC.gov}}</ref>

====Front office====
''Front office'' is generally described as a [[revenue]]-generating role. There are two main areas within front office: investment banking and markets.<ref>{{cite web |title=Front Office |url=https://www.investopedia.com/terms/f/frontoffice.asp |website=Investopedia |access-date=29 January 2019 |archive-date=8 September 2021 |archive-url=https://web.archive.org/web/20210908154402/https://www.investopedia.com/terms/f/frontoffice.asp |url-status=live }}</ref>
* Investment banking involves advising organizations on mergers and acquisitions, as well as a wide array of capital raising strategies.<ref>IBCA [https://www.investmentbankingcouncil.org/blog/to-lead-to-follow-or-to-respond--an-investment-banking-strategists-playbook To Lead, To Follow or to Respond- An Investment Banking Strategist’s Playbook] {{Webarchive|url=https://web.archive.org/web/20210423034425/https://www.investmentbankingcouncil.org/blog/to-lead-to-follow-or-to-respond--an-investment-banking-strategists-playbook |date=2021-04-23 }} Retrieved 24 January 2020</ref>
* Markets is divided into "sales and trading" (including "structuring"), and "research".
<!-- This is, on average, the most prestigious and highest paid department in the bank with first year analysts typically making £60,000 upwards (depending on individual, team and firm performance). {{Citation needed|reason=Claim seems unsubstantiated; credible statistics would back this up. Sentence removed as there is no data or evidence to substantiate the claim that salespeople and traders make less than IBD colleagues, more generally speaking this statement seems both bizarre and inaccurate as broadly speaking trading is seen to be the best paid department at any bank, though stress and job security are less favorable than other front office roles.|date= March 2015}} -->

=====Corporate finance=====
{| class="wikitable floatright" | width="250"
|- style="text-align:center;"
| Corporate Finance transactions<ref name="icaew"/>
|-
|
* [[Mergers and acquisitions]] (M&A), and demergers involving [[private  company|private companies]].
* Mergers, demergers and takeovers of [[public  company|public companies]], including [[Listing_(finance)#Delisting|public-to-private]] deals.
* [[Management buy-out]]s, buy-ins or similar of companies, divisions or subsidiaries—typically backed by [[private equity]].
* Equity issuance by companies, including the listing of companies on a recognised stock exchange by way of an [[initial public offering]] (IPO) and the use of online investment and share-trading platforms; the purpose may be to raise capital for development or to restructure ownership.
* Financing and structuring [[joint venture]]s or [[project finance]].
* Raising [[Infrastructure debt|infrastructure finance]] and advising on [[public-private partnerships]] and [[privatisation]]s.
* Raising capital via the issuance of other forms of equity, debt, [[hybrid security|hybrids of the two]], and related securities for the refinancing and [[Restructuring|restructuring of businesses]].
* Raising [[seed capital|seed]], [[Startup_company#Investing_rounds|start-up]], development or expansion capital.
* Raising capital for specialist corporate investment funds, such as private equity, [[venture capital]], debt, real estate and infrastructure funds.
* [[Secondary market offering|Secondary equity issuance]], whether by means of private placing or further issues on a stock market, especially where linked to one of the transactions listed above.
* Raising and [[Debt restructuring|restructuring private corporate debt]], or debt funds.
|}
{{see|Corporate finance#Investment banking|Financial analyst #Investment Banking}}
{{also|Independent advisory firm|Boutique investment bank}}
[[Corporate finance]] is the aspect of investment banks which involves helping customers raise [[Funding|funds]] in [[capital market]]s and giving advice on [[mergers and acquisitions]] (M&A);<ref name="icaew"/>
transactions in which capital is raised for the corporation include those listed aside.<ref name="icaew">Shaun Beaney, Katerina Joannou and David Petrie [http://www.icaew.com/en/technical/corporate-finance/corporate-finance-faculty/what-is-corporate-finance-122299 What is Corporate Finance?] {{Webarchive|url=https://web.archive.org/web/20171113044048/http://www.icaew.com/en/technical/corporate-finance/corporate-finance-faculty/what-is-corporate-finance-122299 |date=2017-11-13 }}, Corporate Finance Faculty, [[ICAEW]], April 2005 (revised January 2011 and September 2020)</ref>

This work may involve, i.a., subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. 
A [[pitch book]], also called a confidential information memorandum (CIM), is a document that highlights the relevant financial information, past transaction experience, and background of the deal team to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client.<ref>{{Cite web |title=Confidential Information Memorandum (CIM) {{!}} A Detailed Guide |url=https://morganandwestfield.com/knowledge/confidential-information-memorandum-a-detailed-guide/ |access-date=2024-02-28 |website=morganandwestfield.com |date=27 July 2023 |language=en-US}}</ref> 

Recent legal and regulatory developments in the U.S. will likely alter the makeup of the group of arrangers and financiers willing to arrange and provide financing for certain highly leveraged transactions.<ref>{{cite journal|last1=Katz|first1=Jeffrey|last2=Zimmerman|first2=Scott|title=Recent Developments in Acquisition Finance|url=https://www.transactionadvisors.com/insights/recent-developments-acquisition-finance|journal=Transaction Advisors|issn=2329-9134|access-date=2014-11-10|archive-date=2017-01-19|archive-url=https://web.archive.org/web/20170119071112/https://www.transactionadvisors.com/insights/recent-developments-acquisition-finance|url-status=dead}}</ref><ref>{{cite web |last1=Taritsa |first1=Lawrence |title=Everything You Need to Know About Corporate Finance |date=June 2020 |url=https://romeromentoring.com/everything-you-need-to-know-about-corporate-finance/ |publisher=Romero Mentoring |access-date=15 September 2022 |archive-date=15 September 2022 |archive-url=https://web.archive.org/web/20220915134543/https://romeromentoring.com/everything-you-need-to-know-about-corporate-finance/ |url-status=live }}</ref>

=====Sales and trading=====
{{main|Sales and trading}}
On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products.<ref>{{cite web |title=What's the role of an investment bank? |url=https://www.investopedia.com/articles/investing/111114/whats-role-investment-bank.asp |website=Investopedia |access-date=29 January 2019 |archive-date=29 January 2019 |archive-url=https://web.archive.org/web/20190129181351/https://www.investopedia.com/articles/investing/111114/whats-role-investment-bank.asp |url-status=live }}</ref> 

''Sales'' is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a [[caveat emptor]] basis) and take orders. Sales desks then communicate their clients' orders to the appropriate bank department, which can price and execute trades, or structure new products that fit a specific need. 
Sales make deals tailored to their corporate customers' needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types. 
(In distinction, trades negotiated by market-makers usually bear standard terms; in [[Market maker|market making]], traders will buy and sell financial products with the goal of making money on each trade.
See under [[trading desk]].)

''Structuring'' has been a relatively recent activity as derivatives have come into play, with [[structurer|highly technical and numerate employees]] working on creating complex financial products which typically offer much greater margins and returns than underlying cash securities, so-called "yield enhancement". In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US.<ref name="IB_FT">{{cite news
| url = http://www.ft.com/cms/s/0/0fb16d54-de18-11df-88cc-00144feabdc0,dwp_uuid=eddfd4e0-4bc3-11da-997b-0000779e2340.html
| date = 22 October 2010
| title = UniCredit municipal deal nullified
| author = Rachel Sanderson
| work = [[The Financial Times]]
| access-date = 23 October 2010
| archive-date = 8 November 2010
| archive-url = https://web.archive.org/web/20101108203020/http://www.ft.com/cms/s/0/0fb16d54-de18-11df-88cc-00144feabdc0,dwp_uuid=eddfd4e0-4bc3-11da-997b-0000779e2340.html
| url-status = live
}}</ref> 

''Strategists'' advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way [[structurer]]s create new products. 

Banks also undertake risk through [[proprietary trading]], performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. 
Here, and in general, banks seek to maximize profitability for a given amount of risk on their balance sheet. 
Note here that the [[FRTB]] framework has underscored the distinction between the "[[Trading book]]" and the "[[Banking book]]" 
- i.e. assets intended for active trading, as opposed to assets expected to be held to maturity - 
and market risk [[capital requirements]] will differ accordingly.

The necessity for numerical ability in sales and trading has created jobs for [[physics]], [[computer science]], [[mathematics]], and [[engineering]] [[PhD]]s who act as [[Quantitative_analysis_(finance)#Front_office_quantitative_analyst|"front office" quantitative analysts]].

=====Research=====
{{see|Financial analyst|Quantitative analyst|Economic analyst}}
The [[securities research]] division reviews companies and [[Securities research|writes reports]] about their prospects, often with "buy", "hold", or "sell" ratings. Investment banks typically have [[sell-side analyst]]s which cover various industries. Their sponsored funds or proprietary trading offices will also have buy-side research.
Research also covers [[credit risk]], [[fixed income]], [[macroeconomic]]s, and [[Quantitative analysis (finance)|quantitative analysis]], all of which are used internally and externally to advise clients; alongside "Equity", these may be separate "groups". 
The research group(s) typically provide a key service in terms of advisory and strategy.

While the research division may or may not generate revenue (based on the specific compliance policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients.<ref>{{Cite web |title=Research Rules Frequently Asked Questions (FAQ) |url=https://www.finra.org/rules-guidance/key-topics/research-analyst-rules/faq |access-date=2024-02-28 |website=FINRA.org |language=en}}</ref> Research also serves outside clients with investment advice (such as institutional investors and high-net-worth individuals) in the hopes that these clients will execute suggested [[trade idea]]s through the sales and trading division of the bank, and thereby generate revenue for the firm.

With [[MiFID II]] requiring sell-side research teams in banks to charge for research, the business model for research is increasingly becoming revenue-generating. External rankings of researchers are becoming increasingly important, and banks have started the process of monetizing research publications, client interaction times, meetings with clients etc.

There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can impact the performance of a security (in the secondary markets or an initial public offering) or influence the relationship between the banker and its corporate clients, and vice versa regarding [[material non-public information]] (MNPI), thereby affecting the bank's profitability.<ref>{{Cite web |title=Investment Banking Interview Questions |author= |work=Wall Street Prep |date= |access-date=17 December 2021 |url=https://cdn.cdo.mit.edu/wp-content/uploads/sites/67/2021/05/Wall-Street-Prep-Interview-Prep-Guide-2021.pdf |archive-date=17 October 2021 |archive-url=https://web.archive.org/web/20211017003524/https://cdn.cdo.mit.edu/wp-content/uploads/sites/67/2021/05/Wall-Street-Prep-Interview-Prep-Guide-2021.pdf |url-status=live }}</ref>
See also {{slink|Chinese wall#Finance}}.

====Middle office====
This area of the bank includes [[treasury management]], internal controls (such as Risk), and internal corporate strategy.

[[Corporate treasury]] is responsible for an investment bank's funding, capital structure management, and [[liquidity risk]] monitoring; it is (co)responsible for the bank's [[funds transfer pricing]] (FTP) framework.

[[Internal control]] tracks and analyzes the capital flows of the firm, the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses via dedicated trading desk [[product control]] teams. In the United States and United Kingdom, a [[comptroller]] (or financial controller) is a senior position, often reporting to the chief financial officer.

=====Risk management=====
[[File:Risk in Banking.jpg|thumb|Risk in banking]]
{{see|Financial risk management#Investment banking}}
{{see also|Bank#Capital and risk|Treasury management#Banks|Quantitative analysis (finance)#Risk management|Financial analyst#Middle office}}
Risk management involves analyzing the [[market risk|market]] and [[credit risk]] that an investment bank or its clients take onto their balance sheet during transactions or trades. 

Middle office "Credit Risk" focuses around capital markets activities, such as [[syndicated loan]]s, bond issuance, [[restructuring]], and leveraged finance. 
These are not considered "front office" as they tend not to be client-facing and rather 'control' banking functions from taking too much risk. 
"Market Risk" is the control function for the Markets' business and conducts review of sales and trading activities utilizing the [[value at risk|VaR model]]. 
Other Middle office "Risk Groups" include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis.

Front office risk teams, on the other hand, engage in revenue-generating activities involving debt structuring, restructuring, [[syndicated loan]]s, and securitization for clients such as corporates, governments, and hedge funds. 
Here "Credit Risk Solutions", are a key part of capital market transactions, involving [[Structured_finance#Structure|debt structuring]], exit financing, loan amendment, [[project finance]], [[leveraged buy-out]]s, and sometimes portfolio hedging. 
The "Market Risk Team" provides services to investors via derivative solutions, [[Portfolio manager|portfolio management]], portfolio consulting, and risk advisory.

Well-known "Risk Groups" are at [[JPMorgan Chase]], [[Morgan Stanley]], [[Goldman Sachs]] and [[Barclays]]. 
J.P. Morgan IB Risk works with investment banking to execute transactions and advise investors, although its Finance & Operation risk groups focus on middle office functions involving internal, non-revenue generating, operational risk controls.<ref>{{Cite web |url=http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/riskmgmt |title=Risk Management Consulting {{!}} J.P. Morgan<!-- Bot generated title --> |access-date=2013-02-23 |archive-date=2013-03-19 |archive-url=https://web.archive.org/web/20130319012103/http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/riskmgmt |url-status=live }}</ref><ref>{{Cite web|url=http://careers.jpmorgan.com/student/jpmorgan/careers/europe/business/ops|title=J.P. Morgan &#124; Operations – internships and graduate roles<!-- Bot generated title -->|access-date=2013-02-23|archive-date=2013-05-15|archive-url=https://web.archive.org/web/20130515111915/http://careers.jpmorgan.com/student/jpmorgan/careers/europe/business/ops|url-status=live}}</ref><ref>{{Cite web|url=http://careers.jpmorgan.com/student/jpmorgan/careers/us/business/finance|title=J.P. Morgan &#124; Business areas – Finance<!-- Bot generated title -->|access-date=2013-02-23|archive-date=2013-01-27|archive-url=https://web.archive.org/web/20130127155125/http://careers.jpmorgan.com/student/jpmorgan/careers/us/business/finance|url-status=live}}</ref> The [[credit default swap]], for instance, is a famous credit risk hedging solution for clients invented by J.P. Morgan's [[Blythe Masters]] during the 1990s. 
The Loan Risk Solutions group<ref>Barclays Risk Loan http://www.barcap.com/client-offering/investment-banking.html {{Webarchive|url=https://archive.today/20130407181316/http://www.barcap.com/client-offering/investment-banking.html |date=7 April 2013 }}</ref> within Barclays' investment banking division and Risk Management and Financing group<ref>{{Cite web |url=http://www.goldmansachs.com/what-we-do/securities/prime-brokerage/risk-mgmt-and-financing.html |title=Goldman Sachs {{!}}  Prime Brokerage – Risk Management and Financing<!-- Bot generated title --> |access-date=23 February 2013 |archive-url=https://web.archive.org/web/20180707170827/http://www.goldmansachs.com/what-we-do/securities/prime-brokerage/risk-mgmt-and-financing.html |archive-date=7 July 2018 |url-status=dead }}</ref> housed in Goldman Sach's securities division are client-driven franchises.

Risk management groups such as credit risk, operational risk, internal risk control, and legal risk are restrained to internal business functions — including firm balance-sheet risk analysis and assigning the trading cap — that are independent of client needs, even though these groups may be responsible for deal approval that directly affects capital market activities. 
Similarly, the ''Internal corporate strategy'' group, tackling firm management and profit strategy, unlike corporate strategy groups that advise clients, is non-revenue regenerating yet a key functional role within investment banks.

This list is not a comprehensive summary of all middle-office functions within an investment bank, as specific desks within front and back offices may participate in internal functions.<ref>{{Cite web|url=https://www.goldmansachs.com/careers/divisions/finance/|title=Goldman Sachs &#124; Finance|website=Goldman Sachs|access-date=2022-02-01|archive-date=2022-02-01|archive-url=https://web.archive.org/web/20220201000705/https://www.goldmansachs.com/careers/divisions/finance/|url-status=live}}</ref>

====Back office====
The back office data-checks trades that have been conducted, ensuring that they are not wrong, and transacts the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank.{{Citation needed|date=February 2016}}

=====Technology=====
Every major investment bank has considerable amounts of in-house [[software]], created by the technology team, who are also responsible for [[technical support]]. Technology has changed considerably in the last few years as more sales and trading desks are using electronic processing. Some trades are initiated by complex [[algorithms]] for [[Hedge (finance)|hedging]] purposes.

Firms are responsible for compliance with local and foreign government regulations and internal regulations.

===Other businesses===
*'''Global transaction banking''' is the division that provides cash management, [[Securities Services|securities services]] (including custody and securities lending etc.) to institutions. [[Prime brokerage]] with hedge funds has been an especially profitable business, as well as risky, as seen in the [[bank run]] with [[Bear Stearns]] in 2008.
*'''[[Investment management]]''' is the professional management of various securities ([[Share capital|stock]]s, [[Bond (finance)|bonds]], etc.) and other assets (e.g., [[real estate]]), to meet specified investment goals for the benefit of investors. Investors may be institutions ([[insurance companies]], [[pension fund]]s, [[corporation]]s etc.) or [[private investors]] (both directly via investment contracts and more commonly via [[investment fund]]s e.g., [[mutual fund]]s). The investment management division of an investment bank is generally divided into separate groups, often known as [[wealth management|private wealth management]] and [[Private_banking|private client services]].
*'''[[Merchant banking]]''' can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy. Merchant banking is also a name used to describe the private equity side of a firm.<ref>{{Cite web |url=http://www.fdic.gov/bank/analytical/banking/2001sep/article2.html |title=Merchant Banking: Past and Present |access-date=29 January 2008 |archive-url=https://web.archive.org/web/20080214173115/http://www.fdic.gov/bank/analytical/banking/2001sep/article2.html |archive-date=14 February 2008 |url-status=dead }}</ref> Current examples include [[Defoe Fournier & Cie.]] and JPMorgan Chase's [[One Equity Partners]]. The original [[J.P. Morgan & Co.]], [[Rothschild & Co|Rothschilds]], [[Barings]] and [[Warburgs]] were all merchant banks. At the present date, a LionTree, an independent investment and merchant bank originally became a "merchant bank" was the British English term for an investment bank.

==Industry profile==
The investment banking industry can be broken up into [[Bulge Bracket]] (upper tier), [[Bulge Bracket#Middle Market|Middle Market]] (mid-level businesses), and [[Boutique investment bank|boutique market]] (specialized businesses) categories. There are various [[trade association|trade]] associations throughout the world which represent the industry in [[lobbying]], facilitate industry standards, and publish statistics. The International Council of Securities Associations (ICSA) is a global group of trade associations.

In the United States, the [[Securities Industry and Financial Markets Association]] (SIFMA) is likely the most significant; however, several of the large investment banks are members of the [[American Bankers Association]] Securities Association (ABASA),<ref>{{Cite web|url=http://www.aba.com/ABASA/Pages/default.aspx|title=ABA Securities Association|date=July 4, 2012|archive-url=https://web.archive.org/web/20120704040429/http://www.aba.com/ABASA/Pages/default.aspx|archive-date=2012-07-04}}</ref> while small investment banks are members of the National Investment Banking Association (NIBA).

In Europe, the European Forum of Securities Associations was formed in 2007 by various European trade associations.<ref>[http://www.finextra.com/news/fullstory.aspx?newsitemid=16436 Investment banking trade associations join forces in Europe] {{Webarchive|url=https://web.archive.org/web/20130206004054/http://www.finextra.com/news/fullstory.aspx?newsitemid=16436 |date=2013-02-06 }}. Finextra.</ref> Several European trade associations (principally the London Investment Banking Association and the European SIFMA affiliate) combined in November 2009 to form the [[Association for Financial Markets in Europe]] (AFME).<ref>{{Cite web |url=http://www.afme.eu/About/History.aspx |title=History – About – AFME (Association for Financial Markets in Europe) |access-date=16 September 2016 |archive-url=https://web.archive.org/web/20160801060908/http://www.afme.eu/About/History.aspx |archive-date=1 August 2016 |url-status=dead }}</ref>

In the [[securities industry in China]], the [[Securities Association of China]] is a self-regulatory organization whose members are largely investment banks.

===Global size and revenue mix===
Global investment banking revenue increased for the fifth year running in 2007, to a record US$84 billion, which was up 22% on the previous year and more than double the level in 2003.<ref name=IFSL2010>International Financial Services London. (2010). [https://web.archive.org/web/20110810042856/http://www.thecityuk.com/assets/Uploads/Banking-2010.pdf BANKING City Business Series]</ref> Subsequent to their exposure to United States [[Subprime lending|sub-prime]] securities investments, many investment banks have experienced losses. As of late 2012, global revenues for investment banks were estimated at $240 billion, down about a third from 2009, as companies pursued less deals and traded less.<ref>(15 September 2012). [https://web.archive.org/web/20150710233226/http://www.economist.com/node/21562925 Dream turns to nightmare]. ''[[The Economist]]''.</ref> Differences in total revenue are likely due to different ways of classifying investment banking revenue, such as subtracting proprietary trading revenue.

In terms of total revenue, SEC filings of the major independent investment banks in the United States show that investment banking (defined as M&A advisory services and security underwriting) made up only about 15–20% of total revenue for these banks from 1996 to 2006, with the majority of revenue (60+% in some years) brought in by "trading" which includes brokerage commissions and proprietary trading; the proprietary trading is estimated to provide a significant portion of this revenue.<ref name=Rhee2010/>

The United States generated 46% of global revenue in 2009, down from 56% in 1999. Europe (with [[Middle East]] and [[Africa]]) generated about a third, while Asian countries generated the remaining 21%.<ref name=IFSL2010/>{{rp|8}} The industry is heavily concentrated in a small number of major financial centers, including [[New York City]], [[City of London]], [[Frankfurt#Economy and business|Frankfurt]], [[Hong Kong]], [[Singapore]], and [[Tokyo]]. The majority of the world's largest [[Bulge Bracket]] investment banks and their [[investment management|investment managers]] are headquartered in New York and are also important participants in other financial centers.<ref name=NYCWorld'sLargestInvestmentBankingCenter>{{cite web|url=http://www.nyc.gov/html/om/pdf/ny_report_final.pdf|title=Sustaining New York's and the US' Global Financial Services Leadership|publisher=City of New York|author=McKinsey & Company and the New York City Economic Development Corporation|access-date=8 December 2018|archive-date=16 June 2015|archive-url=https://web.archive.org/web/20150616052440/http://www.nyc.gov/html/om/pdf/ny_report_final.pdf|url-status=live}}</ref> The city of London has historically served as a hub of European M&A activity, often facilitating the most capital movement and [[Corporate finance|corporate restructuring]] in the area.<ref>{{Cite book|last=Fohlin|first=Caroline|editor1-first=Youssef|editor1-last=Cassis|editor2-first=Catherine R|editor2-last=Schenk|editor3-first=Richard S|editor3-last=Grossman|title=The Oxford Handbook of Banking and Financial History|date=19 May 2016|chapter=A Brief History of Investment Banking from Medieval Times to the Present|pages=132–162|doi=10.1093/oxfordhb/9780199658626.013.8|isbn=978-0-19-965862-6|chapter-url=http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199658626.001.0001/oxfordhb-9780199658626-e-8|language=en|access-date=8 December 2018|archive-date=25 December 2018|archive-url=https://web.archive.org/web/20181225013413/http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199658626.001.0001/oxfordhb-9780199658626-e-8|url-status=live}}</ref><ref>{{Cite web|url=http://www.financeinstitute.com/blog/the-history-of-investment-banking/|title=The history of investment banking|website=www.financeinstitute.com|date=10 September 2015|language=en-US|access-date=8 December 2018|archive-date=9 December 2018|archive-url=https://web.archive.org/web/20181209082745/http://www.financeinstitute.com/blog/the-history-of-investment-banking/|url-status=live}}</ref> Meanwhile, Asian cities are receiving a growing share of M&A activity.

According to estimates published by the [[International Financial Services London]], for the decade prior to the [[2008 financial crisis]], M&A was a primary source of investment banking revenue, often accounting for 40% of such revenue, but dropped during and after the [[2008 financial crisis]].<ref name=IFSL2010/>{{rp|9}} Equity underwriting revenue ranged from 30% to 38%, and fixed-income underwriting accounted for the remaining revenue.<ref name=IFSL2010/>{{rp|9}}

Revenues have been affected by the introduction of new products with higher [[margin (finance)|margins]]; however, these innovations are often copied quickly by competing banks, pushing down trading margins. For example, brokerages commissions for bond and equity trading is a commodity business, but structuring and trading derivatives have higher margins because each [[Over-the-counter (finance)|over-the-counter]] contract has to be uniquely structured and could involve complex pay-off and risk profiles. One growth area is [[private investment in public equity]] (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and [[accredited investor]]s.

Banks also earned revenue by securitizing debt, particularly mortgage debt prior to the [[2008 financial crisis]]. Investment banks have become concerned that lenders are securitizing in-house, driving the investment banks to pursue [[vertical integration]] by becoming lenders, which has been allowed in the United States since the repeal of the Glass–Steagall Act in 1999.<ref>{{cite magazine|last=Rickards|first=James|title=Repeal of Glass-Steagall Caused the Financial Crisis|url=https://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis|magazine=[[U.S. News & World Report]]|access-date=1 April 2014|date=2012|quote=In fact, the financial crisis might not have happened at all but for the 1999 repeal of the Glass–Steagall law that separated commercial and investment banking for seven decades.|archive-date=7 April 2014|archive-url=https://web.archive.org/web/20140407100807/http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis|url-status=live}}</ref>

=== Top 10 banks ===
{{further|List of investment banks#Largest full-service investment banks|Bulge Bracket#Membership}}
[[File:270 Park Avenue (WTM by official-ly cool 100).jpg|thumb|Many of the largest investment banks, including [[JPMorgan Chase]], belong to the [[Bulge Bracket]]. ]]
According to ''[[The Wall Street Journal]]'', in terms of total M&A advisory fees for the whole of 2020, the top ten investment banks were as listed in the table below.<ref>{{Cite web|title=Investment Banking Scorecard|url=http://graphics.wsj.com/investment-banking-scorecard/|access-date=4 July 2020|website=The Wall Street Journal|language=en|archive-date=26 June 2020|archive-url=https://web.archive.org/web/20200626213303/http://graphics.wsj.com/investment-banking-scorecard/|url-status=live}}</ref> Many of these firms belong either to the [[Bulge Bracket]] (upper tier), [[Bulge Bracket#Middle Market|Middle Market]] (mid-level businesses), or are elite [[boutique investment bank]]s (independent advisory investment banks).
{| class="wikitable"
|- valign="top"
! Rank
! Company
! Ticker
! Fees ($bn)
|- valign="top"
| align="center" | 1.
| {{flagicon|USA}} [[Goldman Sachs]]
| GS
| align="right" |287.1
|- valign="top"
| align="center" | 2.
| {{flagicon|USA}} [[Morgan Stanley]]
| MS
| align="right" | 252.2
|- valign="top"
| align="center" | 3.
| {{flagicon|USA}} [[JPMorgan Chase]]
| JPM
| align="right" | 208.1
|- valign="top"
| align="center" | 4.
| {{flagicon|USA}} [[Bank of America Merrill Lynch]]
| BAC
| align="right" | 169.9
|- valign="top"
| align="center" | 5.
| {{flagicon|UK}} [[Rothschild & Co]]
| ROTH
| align="right" | 94.6
|- valign="top"
| align="center" | 6.
| {{flagicon|USA}} [[Citigroup|Citi]]
| C
| align="right" | 91.8
|- valign="top"
| align="center" | 7.
| {{flagicon|USA}} [[Evercore]]
| EVR
| align="right" | 90.3
|- valign="top"
| align="center" | 8.
| {{flagicon|Switzerland}} [[Credit Suisse]]
| CS
| align="right" | 90.2
|- valign="top"
| align="center" | 9.
| {{flagicon|UK}} [[Barclays]]
| BCS
| align="right" | 71.7
|- valign="top"
| align="center" | 10.
| {{flagicon|Switzerland}} [[UBS]]
| UBS
| align="right" | 65.9
|}
The above list is just a ranking of the advisory arm (M&A advisory, syndicated loans, [[Equity (finance)|equity]] capital markets, and [[debt]] capital markets) of each bank and does not include the generally much larger portion of revenues from [[sales and trading|sales & trading]] and [[asset management]]. Mergers and acquisitions and capital markets are also often covered by ''The Wall Street Journal'' and [[Bloomberg L.P.|Bloomberg]].

{{bar box
|title=Global market share of revenue of leading investment<ref>[https://www.statista.com/statistics/271008/global-market-share-of-investment-banks/] {{Webarchive|url=https://web.archive.org/web/20180903183028/https://www.statista.com/statistics/271008/global-market-share-of-investment-banks/ |date=2018-09-03 }} ''statista'' Retrieved 17 October 2017</ref>
|titlebar=#DDD
|left1=institutions
|right2=percentage
|width=400px
|bars=
{{bar pixel|[[JPMorgan Chase]]|red|81||8.1}}
{{bar pixel|[[Goldman Sachs]]|green|69||7.2}}
{{bar pixel|[[Bank of America Merrill Lynch]]|blue|65||6.1}}
{{bar pixel|[[Morgan Stanley]]|orange|61||5.8}}
{{bar pixel|[[Citi]]|yellow|58||5.3}}
{{bar pixel|[[Credit Suisse]]|fuchsia|46||4.5}}
{{bar pixel|[[Barclays]]|aqua|43||4.3}}
{{bar pixel|[[Deutsche Bank]]|brown|34||3.2}}
{{bar pixel|[[UBS]]|silver|24||2.2}}
{{bar pixel|[[RBC Capital Markets]]|purple|22||2.2}}
|caption= (as of December 2017)
}}

==2008 financial crisis==
The [[2008 financial crisis]] led to the collapse of several notable investment banks, such as the bankruptcy of [[Lehman Brothers]] (one of the largest investment banks in the world) and the hurried [[fire sale]] of [[Merrill Lynch]] and the much smaller [[Bear Stearns]] to much larger banks, which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was bailed out by government taxpayer funded loans through the [[Troubled Asset Relief Program]] (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief.<ref>[https://www.wsj.com/articles/SB122212648830465179 The End of Wall Street] {{Webarchive|url=https://web.archive.org/web/20170709233257/https://www.wsj.com/articles/SB122212648830465179 |date=2017-07-09 }}. ''Wall Street Journal''.</ref> Similar situations have occurred across the globe with countries rescuing their banking industry. Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets.<ref>Erin Nothwehrm [http://blogs.law.uiowa.edu/ebook/sites/default/files/Bailout_Plan_Outline.pdf "Emergency Economic Stabilization Act of 2008"] {{Webarchive|url=https://web.archive.org/web/20121123091943/http://blogs.law.uiowa.edu/ebook/sites/default/files/Bailout_Plan_Outline.pdf |date=23 November 2012 }} [[University of Iowa]] (December 2008). Retrieved 1 June 2012</ref> Eventually, taxpayer assistance to banks reached nearly $13 trillion—most without much scrutiny—<ref>[https://www.pbs.org/wnet/need-to-know/economy/the-true-cost-of-the-bank-bailout/3309/ "The true cost of the bank bailout"] {{Webarchive|url=https://web.archive.org/web/20200111172150/http://www.pbs.org/wnet/need-to-know/economy/the-true-cost-of-the-bank-bailout/3309/ |date=2020-01-11 }} [[PBS]]/[[WNET]] "Need to Know" (3 September 2010). Retrieved 7 March 2011</ref> lending did not increase,<ref>Samuel Sherraden, [http://www.thewashingtonnote.com/archives/2009/07/banks_use_tarp/ "Banks use TARP funds to boost lending – NOT!"] {{Webarchive|url=https://web.archive.org/web/20110717042553/http://www.thewashingtonnote.com/archives/2009/07/banks_use_tarp/ |date=17 July 2011 }} The Washington Note (20 July 2009). Retrieved 7 March 2011</ref> and credit markets remained frozen.<ref>{{cite web|archive-url=https://web.archive.org/web/20100428003015/http://www.businessweek.com/news/2010-04-26/fed-may-keep-rates-low-as-tight-credit-impedes-small-businesses.html |title=Fed May Keep Rates Low as Tight Credit Impedes Small Businesses|work=[[Bloomberg Businessweek]]|date=26 April 2010|first1 = Steve|last1= Matthews |first2= Vivien Lou|last2= Chen|archive-date = 28 April 2010|url = http://www.businessweek.com/news/2010-04-26/fed-may-keep-rates-low-as-tight-credit-impedes-small-businesses.html}}</ref>

The crisis led to questioning of the investment banking [[business model]]<ref name="timesUK">{{cite news | url=https://www.thetimes.com/business-money/companies/article/end-of-the-wall-street-investment-bank-78dgs9fsv7t | work=[[The Times]] | location=London | title=End of the Wall Street investment bank | first=Suzy | last=Jagger | date=18 January 2016 | access-date=7 March 2011 | archive-date=2 June 2015 | archive-url=https://web.archive.org/web/20150602140512/http://www.thetimes.co.uk/tto/business/industries/banking/article2158691.ece | url-status=live }}</ref> without the regulation imposed on it by Glass–Steagall.{{POV statement|date=June 2012}} Once [[Robert Rubin]], a former co-chairman of Goldman Sachs, became part of the [[Clinton administration]] and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit.<ref name="mt-bubble">{{Cite magazine |date=2015-04-05 |title=The Great American Bubble Machine |magazine=[[Rolling Stone]] |last=Taibbi |first=Matt |url=https://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 |archive-url=https://web.archive.org/web/20180701115943/https://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 |archive-date=2018-07-01 |author-link1=Matt Taibbi}}</ref> Formerly, the guidelines said that in order to take a company public, it had to be in business for a minimum of five years and it had to show profitability for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the full impact of the change.<ref name="mt-bubble" />

A number of former Goldman Sachs top executives, such as [[Henry Paulson]] and [[Ed Liddy]], were in high-level positions in government and oversaw the controversial taxpayer-funded [[bank bailout]].<ref name="mt-bubble" /> The TARP Oversight Report released by the [[Congressional Oversight Panel]] found that the bailout tended to encourage risky behavior and "corrupt[ed] the fundamental tenets of a [[market economy]]".<ref>Edward Niedermeyer, [http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-well/ "TARP Oversight Report: Bailout Goals Conflict, Moral Hazard Alive And Well"] {{Webarchive|url=https://web.archive.org/web/20110117091110/http://www.thetruthaboutcars.com/2011/01/tarp-oversight-report-bailout-goals-conflict-moral-hazard-alive-and-well/ |date=2011-01-17 }} (13 January 2011). Retrieved 7 March 2011</ref>

Under threat of a [[subpoena]], Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas banks, hedge funds, and pensions.<ref>Karen Mracek and Thomas Beaumont, [https://www.usatoday.com/money/industries/banking/2010-07-24-goldman-bailout-cash_N.htm "Goldman reveals where bailout cash went"] {{Webarchive|url=https://web.archive.org/web/20120712093054/http://www.usatoday.com/money/industries/banking/2010-07-24-goldman-bailout-cash_N.htm |date=2012-07-12 }} ''[[The Des Moines Register]]'' (26 July 2010). Retrieved 7 March 2011</ref> The same year it received $10 billion in aid from the government, it also paid out multimillion-dollar bonuses; the total paid in bonuses was $4.82 billion.<ref>Stephen Grocer, [https://blogs.wsj.com/deals/2009/07/30/wall-street-compensation-no-clear-rhyme-or-reason/ "Wall Street Compensation–’No Clear Rhyme or Reason’"] {{Webarchive|url=https://web.archive.org/web/20200801022109/https://blogs.wsj.com/deals/2009/07/30/wall-street-compensation-no-clear-rhyme-or-reason/ |date=2020-08-01 }} ''The Wall Street Journal'' Blogs (30 July 2009). Retrieved 7 March 2011</ref><ref>[https://blogs.wsj.com/deals/2009/07/30/goldman-sachs-the-cuomo-reports-bonus-breakdown/ "Goldman Sachs: The Cuomo Report’s Bonus Breakdown"] {{Webarchive|url=https://web.archive.org/web/20170710012447/https://blogs.wsj.com/deals/2009/07/30/goldman-sachs-the-cuomo-reports-bonus-breakdown/ |date=2017-07-10 }} ''The Wall Street Journal'' Blogs (30 July 2009). Retrieved 7 March 2011</ref> Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion in bonuses.<ref>[https://blogs.wsj.com/deals/2009/07/30/morgan-stanley-the-cuomo-reports-bonus-breakdown/ "Morgan Stanley: The Cuomo Report’s Bonus Breakdown"] {{Webarchive|url=https://web.archive.org/web/20170710003848/https://blogs.wsj.com/deals/2009/07/30/morgan-stanley-the-cuomo-reports-bonus-breakdown/ |date=2017-07-10 }} ''The Wall Street Journal'' Blogs (30 July 2009). Retrieved 7 March 2011</ref>

==Criticisms==
{{Seealso|List of corporate collapses and scandals}}
The investment banking industry, including boutique investment banks, have come under criticism for a variety of reasons, including perceived conflicts of interest, overly large pay packages, cartel-like or oligopolistic behavior, taking both sides in transactions, and more.<ref name=greedmerchant>{{cite journal |first=Aaron |last=Brown |title=Review of "The Greed Merchants: How Investment Banks Played the Free Market Game" by Philip Augar, HarperCollins, April 2005 |journal=Global Association of Risk Professionals |date=March–April 2005 |issue=23}}</ref> Investment banking has also been criticized for its opacity.<ref>William D. Cohan, author of ''House of Cards: How Wall St. Bankers Broke Capitalism'', speaking on [[BBC Radio 5 Live]], [[Up All Night (radio show)|''Up All Night'']], 13 April 2011</ref> However, the lack of transparency inherent to the investment banking industry is largely due to the necessity to abide by the non-disclosure agreement (NDA) signed with the client. The accidental leak of confidential client data can cause a bank to incur significant monetary losses.

===Conflicts of interest===
Conflicts of interest may arise between different parts of a bank, creating the potential for [[market manipulation]], according to critics. Authorities that regulate investment banking, such as the [[Financial Conduct Authority]] (FCA) in the [[United Kingdom]] and the [[U.S. Securities and Exchange Commission|SEC]] in the [[United States]], require that banks impose a "Chinese wall" to prevent communication between investment banking on one side and equity research and trading on the other. However, critics say such a barrier does not always exist in practice. [[Independent advisory firm]]s that exclusively provide corporate finance advice argue that their advice is not conflicted, unlike [[bulge bracket]] banks.

Conflicts of interest often arise in relation to investment banks' equity research units, which have long been part of the industry. A common practice is for equity analysts to initiate coverage of a company to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings for investment banking business. Alternatively, companies may threaten to divert investment banking business to competitors unless their stock was rated favorably. Laws were passed to criminalize such acts, and increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble after the [[dot-com bubble]].

[[Philip Augar]], author of ''The Greed Merchants'', said in an interview that, "You cannot simultaneously serve the interest of issuer clients and investing clients. And it’s not just underwriting and sales; investment banks run proprietary trading operations that are also making a profit out of these securities."<ref name=greedmerchant />

Many investment banks also own retail brokerages. During the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.

Since investment banks engage heavily in trading for their own account, there is always the temptation for them to engage in some form of [[front running]]—the illegal practice whereby a broker executes orders for their own account before filling orders previously submitted by their customers, thereby benefiting from any changes in prices induced by those orders.

Documents [[under seal]] in a decade-long lawsuit concerning [[eToys.com]]'s IPO but obtained by ''New York Times''' Wall Street Business columnist [[Joe Nocera]] alleged that IPOs managed by Goldman Sachs and other investment bankers involved asking for [[kickback (bribery)|kickbacks]] from their institutional clients who made large profits flipping IPOs which Goldman had intentionally undervalued. Depositions in the lawsuit alleged that clients willingly complied with these demands because they understood it was necessary to participate in future hot issues.<ref name=Nocera>{{cite news|last=Nocera|first=Joe|title=Rigging the I.P.O. Game|url=https://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo-game.html?_r=0&pagewanted=all|access-date=14 March 2013|newspaper=[[New York Times]]|date=9 March 2013|archive-date=14 March 2013|archive-url=https://web.archive.org/web/20130314005110/http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo-game.html?pagewanted=all&_r=0|url-status=live}}</ref> ''[[Reuters]]'' Wall Street correspondent [[Felix Salmon]] retracted his earlier, more conciliatory statements on the subject and said he believed that the depositions show that companies going public and their initial consumer stockholders are both defrauded by this practice, which may be widespread throughout the IPO [[finance industry]].<ref name=Salmon>{{cite news|last=Salmon|first=Felix|title=Where banks really make money on IPOs|url=http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-make-money-on-ipos/|archive-url=https://web.archive.org/web/20130311201712/http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-make-money-on-ipos/|url-status=dead|archive-date=11 March 2013|access-date=14 March 2013|newspaper=Reuters|date=11 March 2013}}</ref> The case is ongoing, and the allegations remain unproven.

Nevertheless, the controversy around investment banks intentionally underpricing IPOs for their self-interest has become a highly debated subject. The cause for concern is that the investment banks advising on the IPOs have the incentive to serve institutional investors on the buy-side, creating a valid reason for a potential conflict of interest.<ref>{{Cite journal |last1=Lee |first1=Philip J. |last2=Taylor |first2=Stephen L. |last3=Walter |first3=Terry S. |date=1999 |title=IPO Underpricing Explanations: Implications from Investor Application and Allocation Schedules |url=https://www.jstor.org/stable/2676228 |journal=The Journal of Financial and Quantitative Analysis |volume=34 |issue=4 |pages=425–444 |doi=10.2307/2676228 |jstor=2676228 |issn=0022-1090}}</ref>

The post-IPO spike in the stock price of newly listed companies has only worsened the problem, with one of the leading critics being high-profile venture capital (VC) investor, Bill Gurley.<ref>{{Cite web |title=Venture capitalist Bill Gurley on start-ups and economic uncertainty |url=https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/if-youre-going-to-build-something-from-scratch-this-might-be-as-good-a-time-as-in-a-decade |access-date=2024-02-28 |website=McKinsey}}</ref>

===Compensation===
Investment banking has been criticized for the enormous pay packages awarded to those who work in the industry. According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their executives from 2003 to 2008, "while they presided over the packaging and sale of loans that helped bring down the investment-banking system".<ref name=3billion>Tom Randall and Jamie McGee, [https://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGL5l6xOPEHc "Wall Street Executives Made $3 Billion Before Crisis (Update1)"] {{Webarchive|url=https://web.archive.org/web/20150924150308/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGL5l6xOPEHc |date=2015-09-24 }}, Bloomberg, 26 September 2008.</ref>

In 2003-2007, pay packages included $172 million for Merrill Lynch CEO [[Stanley O'Neal]] before the bank was bought by Bank of America, and $161 million for Bear Stearns' [[James Cayne]] before the bank collapsed and was sold to JPMorgan Chase.<ref name=3billion />Such pay arrangements attracted the ire of [[Democratic Party (United States)|Democrats]] and [[Republican Party (United States)|Republicans]] in the [[United States Congress]], who demanded limits on executive pay in 2008 when the U.S. government was bailing out the industry with a $700 billion financial rescue package.<ref name=3billion/>

Writing in the [[Global Association of Risk Professionals]] journal, Aaron Brown, a vice president at Morgan Stanley, says "By any standard of human fairness, of course, investment bankers make obscene amounts of money."<ref name=greedmerchant />

==See also==
* [[Alternative investment]]
* [[Boutique investment bank]]
* [[Devolvement]]
* [[Independent advisory firm]]
* [[Investment Banking Exam]]
* [[List of investment banks]]
* [[Traditional investments]]

==References==
{{Reflist|30em}}

==Further reading==
*Fleuriet Michel Investment Banking Explained: An Insider's Guide to the Industry [[McGraw-Hill Education|McGraw-Hill]] New York NY 2008 {{ISBN|978-0-07-149733-6}}.
*{{cite journal |last=Cartwright |first=Susan |author2=Schoenberg, Richard |date=2006 |title=Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities |journal=[[British Journal of Management]] |volume=17 |issue=S1 |pages=S1–S5 |doi=10.1111/j.1467-8551.2006.00475.x |hdl=1826/3570 |s2cid=154230290 |url=https://dspace.lib.cranfield.ac.uk/bitstream/1826/3570/1/Thirty_Years_of_Mergers_and_Acquisitions_Research-2006.pdf }}
*{{cite journal |last=Harwood |first=I. A. |date=2006 |title=Confidentiality constraints within mergers and acquisitions: gaining insights through a 'bubble' metaphor |journal=British Journal of Management |volume=17 |issue=4 |pages=347–359 |doi=10.1111/j.1467-8551.2005.00440.x |s2cid=154600685 }}
*{{cite book | author=Rosenbaum, Joshua |author2=Joshua Pearl | title=Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions | publisher=[[John Wiley & Sons]] | location=Hoboken, NJ | date=2009 | isbn=978-0-470-44220-3}}
*{{cite book |title=Reasons for Frequent Failure in Mergers and Acquisitions: A Comprehensive Analysis |last=Straub |first=Thomas |date=2007 |publisher=Deutscher Universitätsverlag |location=Wiesbaden |isbn=978-3-8350-0844-1 }}
* {{cite book | last=Scott | first=Andy | date=2008 | title= China Briefing: Mergers and Acquisitions in China | publisher=Springer | edition=2nd |isbn=978-3642149184 }}

{{Corporate finance and investment banking}}
{{Authority control}}

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[[Category:Investment banking| ]]
[[Category:Banking terms]]