Investment Banking

Introduction

● Financial institution that assists individuals, corporations and governments .

● Assists companies in mergers & acquisitions● Investment banks do not take deposits. ● Informative barrier which separates the two to prevent

information.● The private areas & the public areas(types of IB).

EVOLUTION

•Emerged In Early 16th Century

•18th Century

Emerged In Us During American Civil War

Birth Of Famous J.P. Morgan, Goldman Sachs

•19th Century Saw Prominent Banking Partnerships

•20th Century, Dramatic Expansion

EVOLUTION IN INDIA

• Emerged In The 19th Century• Early 20th Century Witnessed,

Agency Houses

1967, ANZ GRINDLAYS, Citibank

1972, SBI, ICICI 

1973, JM FINANCE

ROLE OF INVESTMENT BANK

• Raising capital • M&A• Advisory services.• Brokerage services• Financial research• Underwriting and distributing security issues• Bridge financing• Currency exchange

Front Office

Middle Office

Back OfficeFunctionsOf IB

Front Office

•Helps customers to raise funds in the Capital Markets.

•Advise on mergers and acquisitions.

•Known As “Revenue Generating Role”

•Two Main Areas Of Front OfficeInvestment BankingMarkets

INVESTMENT BANKING

• Advising Big Organizations On Mergers, Acquisitions

• Helps In Wide Array Of Fund Raising Strategies

• This Is, On Average, The Most Prestigious And Highest

Paid Department In The Bank

• They Also Help In Negotiating With A Merger Target

And Coordinating With Bidders.

MARKETS

• Markets Include The Following:

Sales & Trading

a. Traders Buy And Sell Securities Or Financial Products.

b. Calling On Institutional And High-net-worth Investors To Suggest Trading Ideas And Take Orders.

Research

c. Reviews Companies And Makes Reports About Their Prospects, Often With "Buy" Or "Sell" Ratings.

d. May Or May Not Generate Revenue.

e. Helps In Assisting Traders In Trading, Sales Force In Suggesting Ideas To Customers & Investment Bankers By Covering Their Clients.

Middle Office

•It Focus On Identifying And Managing The Level Of Risk That The Company Assumes In Order To Do Business.

•This Requires Not Only Assessing Risk In Terms Of Purchasing Investments, But Also Working With The Front Office To Identify The Risk Of Doing Business With Certain Clients.

•The Middle Office Relies Heavily On Data Collected By The Back Office In Terms Of Profits And Losses, And The Underlying Reasons For Those Activities.

Functions of Middle

Office

Risk Management

Corporate treasury

Compliance

Financial Control

Back Office

It is an important link between finance producing department and its clients.

Crucial Divisions

Operations Department

Information

Technology

Investment and earning divisions of IB

CORPORATE FINANCE

CAPITAL MARKETS

MERGERS

AND

ACQUISITIONS

REAL ESTATE

ASSOCIATION OF INVESTMENT BANKERS OF INDIA

● It is an association of India’s investment banks.● Was earlier called the Association of Merchant

Bankers of India.● Functions: Help members Engage members Participate in policy making.

TOP 10 BANKSRANK COMPANY FEES($m)

1. J. P. Morgan Chase. $5517.62

2. Bank of America. $4945.45

3. Morgan Stanley. $4066.30

4. Goldman Sachs. $3852.95

5. Credit Suisse. $3434.32

6. Deutsche Bank. $3178.15

7. Citigroup. $3166.33

8. Barclays. $2793.70

9. UBS. $2362.69

10. Wells Fargo. $1597.19

World's biggest banks are ranked for M&A advisory, syndicated loans, equity capital markets and debt capital markets.

                                                                                                     

Investment banks Earnings

● By advising corporate clients on the creation of

stocks, bonds and other securities .

● By underwriting securities.

● By facilitating mergers and acquisitions.

● By brokering (or selling) securities to investors.

SEBI REGULATIONS FOR INVESTMENT BANKING

• Qualifications

• Classification

• Oversight

SHIFT NEEDED IN INVESTMENT BANKING INDUSTRY

• LOW INTEREST RATES,

• ABUNDANT LIQUIDITY,

• LOW BARRIERS TO ENTRY,

• RAPID PRODUCT INNOVATION. `

Results of Shift

●Rationalization Of Investment Banks Cost Bases,

Capital Usage And Balance Sheets.

● Risk Aversion Is Now Suppressing Higher-margin

Businesses.

● Job Cuts.

CHALLENGES FACED BY INVESTMENT BANKERS

• MANAGING CAPITAL

• VALUING CLIENT RELATIONSHIP

• BUSINESS INNOVATION

• SUSTAINING VOLATALITY

PROBLEMS FACED BY INDIAN BANKS

• INTENSE COMPETITION FROM FOREIGN RIVALS

• LACK OF FINANCIAL CLOUT

• RBI RULES & LACK OF PROPER SYSTEM

Financial crisis of 2008

● Notable collapse of several banks.

● Entire financial services industry was rescued by government loans.

● Similar situations occurred across the globe.

● Crisis led to the questioning of investment bank .

The Collapse of Lehman Brothers (2008)

The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers

Author: Vicky Ward

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

Author: Lawrence G. McDonald

Brief History of Lehman

Lehman HQ at 745 Seventh Ave, NYC

• Founded in 1850 by brothers Henry, Emanuel, and Mayer

• Lehman survived many challenges throughout the years.

• In 1984 Lehman was acquired by American Express in 1984.

• Regained independence by 1994.

• Lehman became the 4th largest investment bank in the US by the time it collapsed in 2008 in the wake of the fall of the sub-prime mortgage market.

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Key Players

• Richard (Dick) Fuld• CEO and Chairman of the board from 1994 until the collapse of Lehman in 2008.

• Joe Gregory• President of Lehman• Fuld’s right hand man until he was forced out during Lehman’s last gasps.

• David Goldfarb• Former CFO• Former global head of principal investing• Chief strategy officer

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Key Players

• Herbert (Bart) McDade• Managing director and global head of fix income• Global head of equities• President in 2008.

• Henry Paulson• Former CEO of Goldman Sachs• Secretary of the US Treasury• Made the final call not to offer Lehman a bail out.

• New Century Mortgage Corporate HQ• Major lender of sub-prime mortgages during the US housing boom.• Collapsed with the housing market.

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The Culture Inside Lehman Brothers

• Two groups of people made up the culture inside Lehman Brothers.

• The first group was the working class of Lehman.

• This group worked in an environment that was always hectic and fast paced.

• Working with global markets and the demands of their positions required these employees to constantly be operating at full capacity and on the top of their game.

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The Culture Inside Lehman Brothers

• The second group of people was the executive committee.

• Detached from the real operations of the firm.

• Superiority – their decisions were not to be questioned.

• Large returns on risky practices got the best of them.

Risky Business

• There were many types of trades going on inside Lehman, some with high

risk and some with low risk.

• The trade that got Lehman into trouble was the Collateralized Debt

Obligation (CDO)

• Began out in the front lines with lenders like New Century with no doc and NINJA mortgages that were adjustable rate mortgages.

Cont..

• They packaged up $millions worth of these mortgages at a time and they were bought up by Lehman.

• Lehman had them rated and then sold them overseas to banks in China and Japan.

• When the housing market bubble burst, Lehman kept buying, suddenly they had billions in debt they could not sell.

Subprime boom

1. Subsidiary subprime lenders: Neuberger Berman Inc., Aurora Loan Services, Inc., SIB Mortgage Corporation adopted risky lending methods

2. Relaxation of lending practices:

3. Ninja and Non-Doc loans became common place across the industry. Lehman via its subprime lenders was obtaining massive portfolio of loans

4. Repackaging and Reselling bundles of subprime-mortgages via their subsidiaries as well as invest on them.

Reasons behind the collapse

Reasons behind the collapse

The Real state Bubble

1. Slash of the interest rates from the Fed

2. Demand for credit derivatives and relaxed mortgage lending practices fueled the bubble

3. High demand for real estate mortages

4. Lehman property investment was near 50 $billion so depreciation of the real estate market led to loss of capital for the bank.

5. CDOs and ABS values were based on housing prices as a result they lost their value when the housing bubble burst and the subprime borrowers defaulted.

Reasons behind the collapse

● Asset-backed securities (ABS) and Collateral debt obligations(CDOs)

● Lehman underwrote mortage-backed securities more than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity

● Leverage levels up to 20-35 percent of their equity capital in order to invest on securitized products using debt capital

● Excessive risk-taking

● Passing the investment risks through unregulated ‘credit default swaps’ (CDS) where they didn’t have any adequate capital behind them.(AIG case)

● Weakness of the FED to recognize the economic catastrophe that Lehman Brothers bankruptcy would cause.

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Present Day

• Lehman Brothers has been gone since September of 2008.

• The housing market is still flat on its face.

• The rest of the world is slowly recovering from the most devastating financial crisis since the Great Depression of the 1930s.

Thank You