Investment Banking

Overview

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and governments to raise and invest money) was repealed in 1999, it caused tremendous upheaval in the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.

Love-Hate

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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.
Major Players

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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.

Job descriptions and tips

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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 < em>magazine. Their 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.

 You'll need to exude enthusiasm for all things financial. If you don't have the requisite fire in your
belly, you're not going to survive those 4 a.m. proofreading marathons or even half a day on a busy
trading floor.
 Staying well-connected is often key to breaking into investment banking. If you don’t have an aunt
who’s a VP, start building your own network by attending informational interviews, checking out
industry conferences, and tracking down alumni from your college or graduate program. Seek out
advice from those who’ve made it and keep in mind that going back for your MBA may be the next
best step.
 Gentlemen, your suit needs to be navy, your shirt white or light blue, and your tie as expensive and
dull as possible. Don't wear anything Armani till after you get hired. Ladies, please remember the
dollar rule, which states that your navy hemlines should be no higher than the width of an American
one-dollar bill above your knees. If it's a straight, narrow skirt, make sure you measure sitting down.
The recruiters and VPs who are interviewing you for these jobs actually like the idea that investment
banking is the last bastion of conformity. It's all about fitting into a culture.
 Whatever you do, don’t lie on your typo-free resume. You may well get caught (finance is a small
world), which will pretty much ruin your career on Wall Street forever. Do people do it? One recruiter
says: “We once had a guy who claimed he was a Navy SEAL. We checked it out because it seemed so
interesting. It turned out he had never even been in the military. Needless to say, we didn’t hire him,
and we made some calls, and I don’t think anyone else did either. You expect a 15 percent
exaggeration factor on resumes, but some people just go crazy.”