While huge company mergers, initial public offerings, and other big
business transactions may make the headlines, most of them never could have
happened with out the hard work and long hours of a solid investment bank
behind them. When the law requiring the separation of commercial (what we
traditionally call a “bank” from where you deposit and withdraw money) and
investment banks (that work with companies and governments to raise and
invest money) was repealed in 1999, it caused tremendous upheaval in the
industry. Since shortly after the stock market crash of the 1920s,
commercial banks and investment banks had needed to be separate companies,
but today most financial institutions have their fingers in both pies.
Investment banks are experts at calculating what a business is worth,
usually for one of two purposes: to price a securities offering or to set
the value of a merger or acquisition. Securities include stocks and bonds,
and a stock offering may be an initial public offering (IPO) or any
subsequent (or “secondary”) offering. In both cases, I-banks charge hefty
fees for providing this valuation service, along with other kinds of
financial and business advice.
When banks underwrite stock or bond issues, they ensure that institutional
investors, such as mutual funds or pension funds, commit to purchasing the
issue of stocks or bonds before it actually hits the market. In this sense,
I-banks are intermediaries between the issuers of securities and the
investing public. I-banks make markets to facilitate securities trading by
buying and selling securities out of their own account and profiting from
the spread between the bid and the ask price. In addition, many I-banks
offer retail brokerage and asset management services. Retail brokerage
services deal directly with the customers, allowing individuals and small
organizations to purchase stocks, bonds and other financial service
products directly. Asset management services include creating and
overseeing a portfolio of products or services, generally for a wealthy
individual or organization.
Not surprisingly, the center of this industry rests in the lofty aeries
above Wall Street and Midtown in New York City. Other hot spots include
London, San Francisco, and Silicon Valley. Firms also compete in Frankfurt,
Tokyo, Hong Kong, and other foreign markets 24 hours a day.
Trends
Industry Consolidation
In recent years, investment banking has witnessed a rash of cross-industry
mergers and acquisitions in recent times, largely due to the late-1999
repeal of the Depression-era Glass-Steagall Act. The repeal, which marked
the deregulation of the financial services industry, now allows commercial
banks, investment banks, insurers, and securities brokerages to offer one
another’s services. As I-banks add retail brokerage and lending to their
offerings and commercial banks try to build up their investment banking
services, the industry is undergoing some serious global consolidation,
allowing clients to invest, save, and protect their money all under one
roof. These mergers have only added to the downward pressure on employment
in the industry, as merged institutions make an effort to eliminate
redundancy.
Among the M&A activity in recent years: JPMorgan Chase bought Bank One;
Bank of America bought Fleet Boston and MBNA; Wachovia swallowed Golden
West and SouthTrust; Citizens Financial acquired Charter One; and SunTrust
purchased National Commerce.
Meanwhile, foreign firms such as Deutsche Bank and UBS are moving
aggressively into U.S. markets. The result: Firms in the United States and
abroad are looking for partners or acquisitions to beef up their global
presence. These changes are happening overseas as well. In October 2007, a
consortium led by Royal Bank of Scotland acquired 183-year-old ABN Amro of
the Netherlands in a $101 billion transaction that combined the two, making
it the largest banking deal ever made.
Scandals on the Street
The swing in the markets from up, up, up to down, down, down focused a lot
of scrutiny on firms on the Street. One of the biggest issues was the fact
that banks overrated the investment potential of client companies’ stocks
intentionally, deceiving investors in the pursuit of favorable
relationships—and ongoing banking revenue opportunities—with those
companies. Firms also came under fire for the methods by which they
allocated stock offerings (specifically, for whether they charged excessive
commissions to clients who wanted to purchase hot offerings), as well as
for possible manipulation of accounting rules in the course of presenting
clients’ financial info to potential investors.
By now, almost all of the important investment banks have paid fines
totaling in the billions of dollars to settle allegations against them, and
the scrutiny of regulators remains sharp. And banks are paying millions to
purchase independent research to provide to their customers. In addition,
former big-time players on the Street, including research analysts like
Henry Blodget (Merrill Lynch) and Jack Grubman (Citigroup) and bankers like
Frank Quattrone (Credit Suisse), have been accused or convicted of misdeeds
and/or fined and fired.
Will the effects of changes that have come out of the banking scandals be
lasting? Well, yes and no. Some of the laws that came out of the scandals,
such as Sarbanes-Oxley, are complex and their effects are still being felt
today. With hefty fines and even jail terms for those involved, there were
definite tremors throughout the banking world. However, as markets improve,
regulators tend to ease up on doing their jobs, and companies and their
employees become more greedy and prone to breaking the rules to make more
money. Still, with recent banking losses and the credit crunch—and the
possible long-term economic threat from this crisis—coming about as a
result of the popularity of subprime mortgage–backed securities,
finger-pointing about who was to “blame” has been quick to start again.
Much of it was laid at the feet of complex financial products and deals
structured by and purchased by I-banks. Those thinking of playing fast and
loose with the law are likely to be scared straight again.
How It Breaks Down
The Bulge Bracket
There's no clear and uniformly accepted definition of this group, but
it basically includes the biggest of the full-service investment banks.
This is the group that matters most in investment banking, and their names
confer distinction, whether you're a start-up with an IPO to sell, a
Fortune 500 company planning an acquisition, or a job seeker sending out
résumés. Merrill Lynch, Morgan Stanley, Goldman Sachs, Citigroup Global
Markets, Lehman Brothers, Credit Suisse, and JPMorgan Chase hold top spots
in this bracket, at least for the moment.
Boutique and Regional Firms
Boutiques are niche firms that focus on a particular industry, such as
technology, or financing vehicle, such as munis. Regionals, as the name
implies, focus on financing and investment services in a particular
geographic region. The I-banking world extends beyond New York and the
bulge bracket, but the list of small firms is getting smaller as the market
consolidates. The strongest boutique firms—W.R. Hambrecht + Co., Montgomery
Securities, and Alex. Brown—have all been acquired by commercial banks. But
that's not to say independent firms are nearing extinction. In New
York, Allen & Company still does big business in specialized fields.
Job Prospects
After a series of rate cuts from the Federal Reserve, cheap money flooded
the markets in the early 2000s. Investment banks were managing hot IPO and
M&A throughout 2005, 2006 and early 2007. Businesses began spending
money again. More companies were going public. More companies were spending
money to acquire other companies. Emerging markets like China and India
promised vast new banking opportunities. And investment banks were enjoying
stronger revenues than they’ve had in years. The credit crunch put a damper
on that in mid-2007, but that seems to be easing with another Federal
Reserve rate cut and positive economic indicators.
One result is that all those banks that laid off employees when the markets
tumbled are now hiring. And because it’s cheaper to employ a recent grad
than someone with more experience, there are a growing number of jobs to be
had for the cream of the crop from the best schools. Remember: Those who do
I-banking internships will have the best shot at full-time openings.
What's Great
Experience
The world of high finance is, like New York City itself, fast-paced,
high-energy, and go, go, go. This is no place for loafers. It’s also no
place for the sensitive, hesitant, or meek. Insiders tell us that the
experience you gain in investment banking comes at twice the speed of that
acquired in many other professions. This may be due in part to the fact
that investment bankers put in twice as many hours as those in other
professions, but other factors are involved as well. There may be times in
your first year that you are juggling four projects, for four different
people, at once. “You work with lots of different personalities, fight a
lot of fires, and get a crash course in time management,” one insider says.
Furthermore, you may have the opportunity to meet and interact with the
CEOs and CFOs of major public corporations. Be on your best behavior. It’s
not uncommon for an impressive young investment banker to be recruited into
a client’s finance or business development department.
Education
Many insiders tell us that the education and skills you gain in investment
banking are invaluable. There is no better way to learn about finance, the
inner workings of Wall Street, and how the business world generally works.
When you read a headline stating that IBM is acquiring a hot new software
developer, you can be sure a team of investment banking analysts is
grinding out spreadsheet model after spreadsheet model to tell IBM how much
it should pay and what return it will get on the investment. Those
analytical skills, in conjunction with the introduction investment banking
gives you to the world of finance, provide a great launching pad for almost
any career path you may ultimately choose. Just don’t get used to the big
paycheck.
Money
Okay, let’s face it. You’re not considering a career in investment banking
because you want to save the world. You have the rest of your life for
that, and you probably won’t be spending the rest of your life on Wall
Street. If you’re an undergraduate or MBA steeped in debt, or you want to
be at the top of your peer group in terms of salary, investment banking is
a good choice. Even with big-city rents and restaurant prices, you’ll
almost certainly build up a hefty savings account. While starting salaries
and bonus packages are similar in the first two years for both consultants
and bankers, when business is good investment bankers usually continue up a
steep salary curve while consultants do not.
What's to Hate
Well, First the Obvious…
Has anyone seen my social life? I seem to have misplaced it. Being an
analyst or associate at an investment bank is like being a doctor on call.
This doesn’t just mean that you’ll regularly be working 60 to 80 hours a
week. It means canceling vacations, receiving phone calls between 4 and 6
a.m., and, probably worst of all, just when you’re wrapping up your mellow
day around 6 or 7 in the evening, having the new hotshot banker come over
and add an urgent item to your “to do” list. And Hotshot needs it before
tomorrow’s 8 a.m. flight to Chicago. You go back to your desk, order
dinner, and settle in for the night. In the banking business, your life
comes second to your job. Though this varies both by firm and by
department, insiders tell us that you can generally plan on working at
least 12-hour days—and count yourself very lucky if that’s all you do.
Still, there are some reports of banks trying to woo employees—especially
those returning to I-banking after a hiatus—with promises of more flexible
work hours and other perks.
The Three Ps
Investment banking revolves around the three Ps—power, politics, and
personalities. Most of the investment bankers you’ll work with will be
hardworking, goal-oriented young people like you, but when you have a lot
of motivated, competitive Type As jockeying for their shares of the
year-end bonus pot, political skirmishes are bound to erupt. Here’s what
one of our undergraduate investment banking insiders says: “The politics
and personalities in investment banking are not the easiest to deal with,
particularly as an analyst. This is ultimately why I left investment
banking. First-year analysts often deal with hazing, practical jokes, and
the worst assignments. (MBA-laden associates are generally excluded.)
Second-year analysts often delegate their own grunt work to the first-years
and hoard the more interesting and challenging work. And management often
doesn’t manage; life is the deal, and everything else is secondary. You
don’t move up the ranks of an investment bank because you are a good
manager, but rather because you work hard, understand finance, and bring in
deals.”
Wearying Work
It might be sacrilegious to say this in the company of corporate
recruiters, but insiders say that the work you do as an investment banker
is not always interesting. Don’t be blinded by dreams of a Wall Street job
filled by constant excitement, glamour, and wheeling and dealing. All
insiders tell tales of coma-inducing spreadsheet work that would threaten
analysts’ lives if they weren’t jolted back to reality by the endless
blinking of their voice mail lights. In most offices, the assistants go
home at 5 p.m. or so, and who do you think handles copying and faxing after
that hour? Not the senior managing directors, that’s for sure. But then,
there are exciting times. For some, that makes it all seem worthwhile. The
adrenaline junkie in you ought to be pleased.
Top Ten Major Players, by 2006 Revenue | ||||
Rank | Company | Revenue ($M) | Employees | |
1 | Morgan Stanley | 76,551 | 55,310 | |
2 | Merrill Lynch | 70,591 | 56,200 | |
3 | Goldman Sachs | 69,353 | 26,467 | |
4 | Credit Suisse | 67,532 | 44,871 | |
5 | Lehman Brothers | 46,709 | 25,900 | |
6 | Citigroup Corporate and Investment Banking | 27,187 | n/a | |
7 | Bank of America Global Capital Markets and Investment Banking | 22,691 | n/a | |
8 | UBS Investment Bank | 18,423 | 21,899 | |
9 | JPMorgan Investment Bank | 18,300 | 27,000 | |
10 | Bear Stearns | 16,551 | 13,566 | |
Sources: Company websites; SEC filings; Hoover's; WetFeet analysis. | ||||
Key Jobs
Jobs in investment banks are divided into four areas: corporate
finance, sales, trading, and research. Movement between areas isn't
unheard of, but since doing your time and moving up the ranks in one
area is the quickest way to make a lot of money, most people stay put.
Corporate Finance
Think of corporate finance as
financial consulting to businesses. Specific activities range from
underwriting the sale of equity or debt for a corporate client to
providing advice on mergers and acquisitions, foreign exchange,
economic and market trends, and specific financial strategies. When
most people refer to investment banking, this is what they mean.
CorpFin (as it is known internally) analysts work 80-hour weeks to
help prepare (i.e., proofread and Xerox) pitch books to compete against
other banks for prospective clients. They run endless financial models
and help prepare (again, proofread and Xerox) due diligence on target
companies. After 2 or 3 years, they're off to B-school.
MBAs are brought in at the associate level, where they help
underwrite equity (stocks) and fixed-income (bond) offerings, write
sections of pitch books, and sit in on client meetings—mostly taking
notes—and help devise financial strategies. They also supervise teams
of analysts. After 3 or 4 years, they move up to vice president; after
another 3 to 5 years, they make it to managing director. Salary range:
$100,000 to $170,000, including bonuses, for associates; $200,000 to
$300,000 or more, including bonuses, for VPs.
Sales
Some firms only hire MBAs for sales jobs.
Other firms don't even ask about your education. In either case, the
bottom line is how well you can sell the new debt and equity issues
CorpFin unloads on your desk—and how quickly you can translate news
events or a market shift into transactions for your clients. These jobs
are usually much less hierarchical than the banking side. Your sales
volume and asset growth are what matter. Salary range: about $40,000,
with a $5,000-plus signing bonus for undergrads; MBAs start at $65,000
to $85,000, with a signing bonus. Year-end bonuses fluctuate; if it’s
been a good year in the market, they can be as high as 80 to 100
percent of base pay.
Trading
When Hollywood directors want to
portray the rough, unruly underside of Wall Street, they wheel the
cameras onto a trading floor. This is as close to the money as you can
get. Trading also commands respect because it's tougher, riskier, and
more intense than any other job in finance. Traders manage the firm's
risk and make markets by setting the prices—based on supply and
demand—for the securities CorpFin has underwritten. Like sales, but
more so, you're tied to your desk and phones while the markets are
open—but you get to leave after the closing bell.
Beginners fetch endless takeout food and run other thankless
errands; more seasoned traders scream and yell when their markets heat
up and do the crossword puzzle the rest of the time. Not for the
genteel or the faint of heart. A few traders even grow up to be CEOs.
Why? Because they know more about the markets and money than anyone
else in banking. Salary range: similar to that in sales.
Research Analyst
Research departments are
generally divided into fixed income (debt) and equity. Both do
quantitative research (corporate-financing strategies, product
development, and pricing models), economic research (forecasts for U.S.
and international markets, interest rates, currencies), and individual
company coverage. An equity analyst usually focuses on a particular
sector—software, oil and gas, or health care, for example.
You move up in this profession by consistently predicting the
movement of specific company stocks. The best analysts are ranked
annually by
buy, sell, and hold recommendations wield enormous clout, and
competition among firms for the top analysts can be intense. Salary
range: For the few undergrads and MBAs hired, starting salaries and
signing bonuses are often slightly higher than the rest of investment
banking. Senior analysts earn six figures and up (way up).
Getting Hired
Being hungry for an investment banking job is at least as important
as having a top-tier school on your resume. Wall Street firms see a lot
of flashy pedigrees, but what really makes a candidate stand out is
enthusiasm and commitment to work.
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