Investment Banking

Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert Shiller at Yale University

February 4, 2010

Investment Banking

The term bank is misleading since this is often used in everyday life

as a synonym for a depository institution. A depository institution is

an institution that accepts deposits from individuals and companies and

later on the owner can take the money back at an interest. Meanwhile the

institution makes loans, or invest the money at higher interest rates

than they give out on the deposits and that is how they make a profit

(e.g. a savings- ,savings and loan- or commercial bank).

Historically and at

present however a majority of institutions do both. Investment banking

means the underwriting of securities. They arrange for the issuance by

other institutions of securities (i.e. if Ford Motor Company would want to issue

new shares or bonds they would go to an investment bank and the investment bank would

underwrite the issuance).

A pure investment bank is not a depository

institution, nor is it a broker/dealer because they are not trading in

securities although they would deal in securities as part of the

underwriting process.

The Glass-Steagall Act of 1933

The stock market crashed in 1929 causing tremendous chaos in the

financial markets. Carter Glass (D), a senator from Virginia, and Henry

Steagall (D), a representative from Alabama, put together a bill that

passed congress and was signed by President Roosevelt that was designed

to control speculation and basically stated that investment banking

cannot be combined commercial banking or insurance. (e.g. J.P. Morgan & Co,

one of the biggest banks of the US, which was founded by James Pierpont Morgan was

informed that it had to chose whether it wanted to be an investment bank or a commercial

Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert...