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Investment Banking

Defining Events

There have been many events, laws, and developments that have shaped the investment banking industry. For example, the Gramm-Leach-Bliley Act, which was signed by President Bill Clinton in 1999, allowed banks, insurance firms, and investment banks to affiliate under the umbrella of a new entity, a financial holding company. Under the new system, banking, insurance, and securities activities are “functionally regulated,” with the Federal Reserve given authority to supervise and inspect records of the newly created financial holding companies. When the financial crisis occurred in the late 2000s, some major investment banks, such as Goldman Sachs, had to restructure their businesses into bank holding companies in order to accept government bailout funds. In addition, the effects of technological change on investment banking over the past 40 years cannot be ignored. For example, the arrival of cheap desktop personal computers in the 1980s at the big investment banks opened up whole new worlds of financial modeling. These modeling techniques, the Black-Scholes options pricing model being a well-cited example, were a door opener for all kinds of financial modeling techniques, pricing scenarios, and securities trading. Market-making and proprietary trading, putting the firm’s own money at risk, became a major profit center, surpassing revenues from the traditional broker-dealer lines of business. The passage and repeal of the Glass-Steagall Act, the Great Recession of December 2007-June 2009, and slowly increasing opportunities for women investment banking professionals are other noteworthy events in the investment banking industry.

The Rise and Fall of Glass-Steagall

The famous Glass-Steagall Act, enacted in 1934, erected barriers between commercial banking and the securities industry. A piece of Depression-era legislation, Glass-Steagall was created in the aftermath of the stock market crash of 1929 and the subsequent collapse of many commercial banks. At the time, many blamed the securities activities of commercial banks for their instability. Dealings in securities, critics claimed, upset the soundness of the banking community, caused banks to fail, and crippled the economy. Therefore, separating securities businesses and commercial banking seemed the best solution to provide solidity to the U.S. banking and securities’ system.

In later years, a different truth seemed evident. The framers of Glass-Steagall argued that a conflict of interest existed between commercial and investment banks. The conflict of interest argument ran something like this: 1) A bank that made a bad loan to a corporation might try to reduce its risk of the company defaulting by underwriting a public offering and selling stock in that company; 2) The proceeds from the IPO would be used to pay off the bad loan; and 3) Essentially, the bank would shift risk from its own balance sheet to new investors via the initial public offering. Academic research and common sense, however, has convinced many that this conflict of interest isn’t valid. A bank that consistently sells ill-fated stock would quickly lose its reputation and ability to sell IPOs to new investors.

In the late 1990s, before legislation officially eradicated the Glass-Steagall Act’s restrictions, the investment and commercial banking industries witnessed an abundance of commercial banking firms making forays into the I-banking world. The feeding frenzy reached a height in the spring of 1998. In 1998, NationsBank bought Montgomery Securities, Société Génerale bought Cowen & Co., First Union bought Wheat First and Bowles Hollowell Connor, Bank of America bought Robertson Stephens (and then sold it to BankBoston), Deutsche Bank bought Bankers Trust (which had bought Alex. Brown months before), and Citigroup was created in a merger of Travelers Insurance and Citibank. While some commercial banks have chosen to add I-banking capabilities through acquisitions, some have tried to build their own investment banking business. JPMorgan stands as the best example of a commercial bank that entered the I-banking world through internal growth, although it recently joined forces with Chase Manhattan and, more recently, BankOne to form JPMorganChase. Interestingly, JPMorgan actually used to be both a securities firm and a commercial bank until federal regulators forced the company to separate the divisions. The split resulted in JPMorgan, the commercial bank, and Morgan Stanley, the investment bank. Today, JPMorgan has slowly and steadily clawed its way back to the pinnacle of the securities business, and Morgan Stanley has merged with Dean Witter to create one of the larger I-banks on the Street.

So why did it take so long to enact a repeal of Glass-Steagall? There were several logistical and political issues to address in undoing Glass-Steagall. For example, the Federal Deposit Insurance Corporation and the Federal Reserve regulate commercial banks, while the Securities & Exchange Commission regulates securities firms. A debate emerged as to who would regulate the new “universal” financial services firms. The Fed eventually won with then-Fed chairman Alan Greenspan defining his office’s role as that of an “umbrella supervisor.” A second stalling factor involved the Community Reinvestment Act (CRA) of 1977—an act that requires commercial banks to reinvest a portion of their earnings back into their community. Senator Phil Gramm (R-TX), Chairman of the Senate Banking Committee, was a strong opponent of this legislation while then-President Clinton was in favor of keeping and even expanding CRA. The two sides agreed on a compromise in which CRA requirements were lessened for small banks.

In November 1999, Clinton signed the Gramm-Leach Bliley Act, which repealed restrictions contained in Glass-Steagall that prevent banks from affiliating with securities firms. The new law allowed banks, securities firms, and insurance companies to affiliate within a financial holding company (“FHC”) structure. Under the new system, insurance, banking, and securities activities were “functionally regulated.”

The Great Recession

In 2007 the United States began to suffer through a financial crisis that many economists believe was the worst downturn since the Great Depression. During the crisis, which lasted from December 2007 to June 2009 and has become known as the Great Recession, the U.S. housing market crashed, many people who had taken out subprime mortgages lost their homes, and interbank credit markets dried up, causing the failure of many banks and businesses. During this time, several major investment banks failed. Lehman Brothers declared bankruptcy and went into receivership. Merrill Lynch was acquired by Bank of America for much less than its market value. And Bear Stearns was acquired by JPMorgan for pennies on the dollar.

The federal government stepped in to bail out some financial institutions (such as mortgage giants Freddie Mac and Fannie Mae) that it deemed “too big to fail.” It allowed other banks, such as Lehman Brothers, to fail. Congress approved a $700 billion rescue package for the financial sector, and the U.S. Department of the Treasury required even healthy banks to accept Troubled Asset Relief Program (TARP) funds to help encourage confidence in the banking sector. It also purchased outright the problematic financial assets (mortgage-backed securities) of some banks. Some investment banks, such as Goldman Sachs, had to restructure their businesses into bank holding companies to accept TARP funds.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which increased regulation of the financial industry and offered improved protections to consumers. The Act requires all investment management firms with more than $150 million in assets under management to register with the Securities and Exchange Commission, bank holding companies with more than $50 billion in assets to abide by stringent liquidity and capital standards, and financial institutions to take on higher levels of credit risk regarding the sale of asset-backed securities, among a variety of other rules. Additionally, the Volcker Rule, a provision of Dodd-Frank, restricts banks from conducting certain investment activities with their own funds and prohibits them from investing in or sponsoring venture capital, private equity, and hedge funds in most cases.

The Great Recession and the ensuing legislation geared to rein in the excesses of the financial industry had and continue to have a profound effect on the investment banking industry. Some banks, such as Deutsche Bank, Credit Suisse, RBS, and UBS, have retreated from their equity sales and trading activities (instead, focusing on more lucrative wealth management services and lending to companies; Morgan Stanley’s acquisition of Smith Barney is just one example of this trend). Goldman Sachs, one of the largest investment banks in the world, has developed a retail banking business (although it has retreated from this strategy in recent years). Others have pulled back from certain markets or become niche players because they realize that they can no longer be all things to all people and are seeking to cut costs amidst falling revenue.

These developments have also prompted significant cuts in staffing. The number of investment bankers, sales workers, research analysts, and traders has declined in the last decade. Many people leave the field because of the long work hours, limited chances of advancement (for some positions), and other factors. “After years of job cuts and reorganizations, most of the world’s biggest investment banks do very little investment banking today,” according to the Financial Times. “Of the 10 largest global banks only two—Goldman Sachs and Morgan Stanley—still make the most of their revenue from their investment banking operations, compared with six before the global financial crisis.”

Women Slowly Break the Glass Ceiling

The investment banking industry has traditionally been a man’s world (especially in front-line deal-making and advisory positions, as well as in managerial- and board-level positions). But this is slowly changing. Deloitte reports that the proportion of women in leadership roles in the financial services sector was 24 percent in 2021, and it is projected to grow to 28 percent by 2030—still below parity. This percentage could be much worse, but it is still far lower than the percentage of women (about 54 percent) employed in the finance and insurance sectors in the United States. Many of these women work in support positions. The more sobering statistics relate to women in leadership positions. Less than 17 percent of executive/senior-level positions in the I-banking industry are held by women, according to Catalyst. In 2023, women comprised only 29 percent of board members at Morgan Stanley, 31 percent at UBS, and 36 percent at Barclays. Goldman Sachs (43 percent) and JPMorgan Chase & Co. (42 percent) rank slightly higher.

Although the overall number of women in the I-banking industry has risen over the last decade, the number of women in leadership positions is still appallingly low—even if it has increased slightly in recent years. These low stats are also ironic because studies by Catalyst, the Credit Suisse Research Institute, and other organizations find that companies with significant numbers of women on their corporate boards typically outperform those with no female board members.

In the past decade or so, many large investment banks have increased their efforts to create a more diverse workforce. For example, Credit Suisse offers a Diversity Internship Program, in which outstanding women who are not studying finance or banking learn more about banking essentials, find out more about different departments at the company, learn how to solve real business challenges, and receive mentoring and support from female banking professionals. Credit Suisse also offers a Women's Mentor Program, in which female college sophomores learn about the industry, work with a mentor, and attend a multi-day career development program in its New York City office. Participants also have the opportunity to apply for an internship during their junior year of college. Goldman Sachs offers an Undergraduate Camp, an interactive multi-day program for Black, Latino/Hispanic, Native American, and/or first-generation college freshmen and sophomores of all majors. Participants learn about the financial services industry and participate in interactive case studies, group projects, technical and soft skills training, and networking with Goldman Sachs professionals. It also offers an MBA Diversity Symposium, a one-day event for first-year MBA students who identify as Black, Hispanic/Latinx, Native American, or women; who are interested in pursuing a Summer Associate opportunity; and who would like to learn more about the financial services industry and summer internship opportunities. Evercore offers a variety of diversity programs, including the New York Sophomore Diversity Seminar, Women’s Sophomore Symposium, Menlo Park Diversity Seminar, and Diversity MBA Fellowship. Professional associations such as the American Bankers Association and the Accounting & Financial Women’s Alliance are also striving to improve diversity in the field—especially in top-level positions.

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