The Role of Investment Banking in the Us Financial System Essay

2981 Words Apr 23rd, 2007 12 Pages
Introduction to Investment Banks The roots of investment banks are varied. Some are bankers or merchants who started guaranteeing other merchants' bills, others are outgrown brokerages, but most are products of the Glass-Steagall Act. Originally, the term "investment bank" comes from the United States of America, while some other variations include ‘merchant bank' in the United Kingdom and ‘securities house' in Japan. With the globalization of US investment banking, the term has become a generic concept, nonetheless, while in the USA merchant bank has come to mean a bank which risks its own capital in bridge loans and position taking. Small, limited-function investment banks are called ‘boutiques'. They thrive on relationships and …show more content…
They were well-paid advisers to the corporate heads who put together those conglomerates. Subsequently in the 1980s, there was a shift in power from the corporate chiefs to the corporate raiders and the investment banking houses that managed the changes in control. The mergers and acquisitions specialists of investment-banking firms earned millions of dollars for their firms, often by instigating the acquisitions and then structuring the deals for the raiders. The mergers and acquisitions business has been a tight oligopoly dominated by the large investment bankers, including Morgan Stanley, Goldman Sachs and several others. Along with the intense competition for securities commissions and underwriting revenues, mergers and acquisitions (M&A) represent a very profitable line of business for securities firms. Although the mergers and acquisitions teams are small, they are generating large revenues for their firms. In 1985 Morgan Stanley's mergers and acquisitions group included just 120 out of the firm's total employment of 5,000. In that same year, Morgan Stanley's mergers and acquisitions unit produced $300 million of the firm's total investment-banking revenues of $424 million and one-third of its total operating revenue (Business Week, November 24, 1986, cited in Matthews 1994 p. 20). The financing for these deals opened the door to creative

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