Career Roadmap

Investment Banking

What is Investment Banking?

With the decline of the military's once-venerable institution, however, has come a concomitant rise in another recruiting institution: the Wall Street Investment Banking Machine. From lower Manhattan to midtown, the well-oiled device hums around the clock and around the calendar. Its serpentine tentacles are rooted in nearly every well-regarded undergraduate institution in the country and all of the top business schools. The machine's sole objective: to fill the conduit with as many analysts and associates-the serfs and indentured servants of the investment banking world-as it can find. (Excerpt From Monkey Business by Peter John/ Troobe Rolfe).

Ask a graduating MBA from any top B-school what his or her dream job would be: 9 out of 10 times the words "Investment Banking" would feature in the list.

This is especially ironical considering the fact that this is an industry where "work pressure " assumes new heights of sadism, where spending 16+ hours in office is the norm, where literally speaking, "Only the Paranoid Survive". Yet, thousands of graduating MBA's go into their recruitments with the dream of making it big in the Wall Street's of the world. This is because the intensely competitive and profit-hungry world of Investment Banking promises obscene amounts of money for salaries and the chance to make money grow instantly by using little else besides your intellectual and analytical prowess!

What is Investment Banking? An investment bank is different from your traditional bank down the street in the sense that it does not keep any deposits with itself to pay you an interest nor does it guarantees the "safekeeping" of your money. An investment bank is more specialized organization that takes in your money and after analyzing the possible risks and economic conditions gives you advice to convert it into more money. The services provided by Investment Banks takes many forms: securities underwriting, stock and bond trading, facilitating mergers and acquisitions, arranging and funding syndicated loans and providing financial advice to companies on aspects like pricing of securities. The domain of I-Banking has widened in the U.S. since 1999 with the repeal of Glass-Steagall Act in the form of Gramm-Leach-Bliley Act bringing down the barriers between Commercial and Investment Banking. I-banks, having been allowed a much bigger playing field, are increasingly venturing into providing private financial services a la commercial banks. A broader and better definition of investment banking is to think of investment banking as an industry, which either trades directly in capital market products or uses the underlying capital markets, to construct different financial products (Capital Markets Consulting Group, 2002).

Recent Developments in Investment Banking

Typically, when the economy is booming equity trading and M&A advisory take the lion's share in terms of revenues for the I-Banking industry. The trend shifts in difficult economic times with fixed income share of revenues increasing sharply.

Investment banking operates in extremely volatile environments with factors like economic conditions, monetary and fiscal policies, the liquidity of global markets, international and regional political events, acts of war or terrorism, changes in applicable laws and regulations, the competitive environment and investor sentiment all impacting the actions and policies of I-bankers.

Recent Technological Developments that have affected Investment Banking

The Internet Revolution has been a necessary evil for the Investment Banking industry. While on the one hand, it has empowered I-banks to get instant access to loads of information for taking more informed decisions, it has eroded away the margins on the buying and selling of securities thus sounding a death-knell for the jobs of thousands. The fat profits that brokerages could charge their clients for trading securities received a body-blow with the introduction of online trading systems charging low commissions. Suddenly all the heavyweights jumped onto the internet bandwagon with online trading systems of their own. With more than 200 electronic brokers in the fray, the prediction of US$5 trillion online by 2005 does not seem unachievable at all. If anything, it makes the competition fiercer with companies having to "re-invent themselves" in order just to stay afloat!

Recent Political and Legal developments that have affected Investment Banking

One of the most significant legal actions affecting the industry has been the repeal of the Glass-Steagall Act of 1933 by the Clinton Administration in 1999. With the demarcation lines blurring out between investment and commercial banks, the twenty-first century witnessed an upsurge in the number of Mergers & Acquisitions with the "larger fish" like Citigroup trying to make their presence felt in the I-banking business as well. While this acquisition wave spelt the doom of many small investment firms, it also allowed the larger players to enter commercial banking and enhance their product portfolio to include products and services dealing with commercial banking. In 2002, the U.S. Congress passed the Sarbanes-Oxley Act of 2002 which is a broad overhaul of existing corporate and securities laws.

These companies happened to be clients of that particular investment bank. The reports were "fudged" to promote investors to buy the company's share which, in turn, increases the underwriting fees of the banks. The research analysts are promised fat paychecks to manipulate reports. This collusion was one the primary factors for the dot-com "bubble burst" in 2000. Law calls for the building of a "Chinese Wall" or no communication between the distinct sections of business of an investment bank. However, this law has not been stringent enough in curbing the possible "conflict of interest".

What is the future of Investment Banking?

The European Investment Banking Analysis 2001 predicts the global revenues of the investment banking industry to increase by 80% in 10 years and contribute to 1% of World GDP. It also foresees Europe as the leading force in global revenues growth. The situation as it stands now resembles an oligopolistic competition where the bulge bracket firms increasing their market shares in times of uncertainty at the cost of the smaller firms. If the economic downturn does not improve, the smaller firms will be squeezed out of margins by the bulge bracket firms and would end acquisition victims to large commercial banks wanting to expand their clientele. Ownership of a large asset management operation, securities lending and borrowing can create additional revenue generation opportunities for investment banks. Investment banks will have to use their creative ingenuity to come up with new financial vehicles based on derivatives, guarantees and non-directional strategies targeted at rich private consumers.

Smart management and an equally diligent staff to deal with the uncertainties of the investment banking world is a must if the Investment Banking industry were to achieve its target of 80% growth by 2010. In an environment fraught with uncertainty, the industry can be sure of one thing: blue-blooded MBA's will continue flocking to its folds and would love being willing "serfs and indentured servants of the Investment Banking Industry"!

(Source: About.com)

Print Resources
Harvard Business School Career Guide: Finance - career opportunities, company profiles, position descriptions and recruiting process.

Nelson's Directory of Investment Managers - profiles of over 2,600 organizations involved in investment management. Also available on CD-ROM.

Plunkett's Financial Services Industry Almanac - information on leading firms in Investments, Insurance, Banking and Financial Information.

Online Resources

Investor Dealers Digest

Institutional Investor

WetFeet

Vault.com

Bloomberg

Wall Street Journal

More Resources - www.som.yale.edu/careers/resources/career_sectors.asp

Job Search Web Sites - www.som.yale.edu/careers/jswebsites/jswebdefault.asp

Investment Banking Career Preparation Timeline

Investment banking opportunities, especially at the internship level, are intensely competitive. In order to successfully navigate the investment banking recruiting process, research, discipline and focus are required. While most of the big banks have internship positions, they are very competitive so be prepared!  And, if you are not successful in landing an investment banking summer internship, you should not feel discouraged. Many of our graduates who have successfully received full-time investment banking offers pursued various types of internships that provided them with the analytical and personal skills that helped make them receive their final offer.