Business Economics: Investment Banking
Business Economics:
Investment Banking – Credit Default Swaps – Mortgage Backed Securities –
Keller Graduate School of Management
GM545 – Business Economics
The world of investment banking has changed since the recession of 2007-2008. The global impact of unregulated credit lending procedures, the Credit Default Swaps market, and mortgage-backed securities have crippled the economy and have called for regulations to bring economic stability back to the markets. Prior to the recession, investment banking was an idealized industry where bonuses equaled individual salaries, yet oversight was practically non-existent. This freedom allowed greed to lead carelessness, packaged with poor credit lending procedures, leading to the recession of 2007-2008 and the reformation of investment banking as we once knew it. Investment banking is a term assigned to the marketplace of buying and selling securities, underwriting, mergers and acquisitions, market making, foreign exchange, and buy-side and sell-side transactions. Investment banks are a financial institution that assists individuals, corporations, and governments in raising capital using various techniques on the buy and sell-side of the market. As of Oct. 11, 2008, towards the end of the recession, banking revenues within the United States make up 15% of the nation’s overall GDP. The total revenues of the ten largest investment banks total $495.371 billion. It should also be noted that the investment banking sector accounts for an almost 30% share of all profits made by US corporations. As we have drawn a relative picture to establish the size of the investment banking sector, let’s move onto understanding what role investment banks play in the credit lending system and assess how some of their strategies maybe to blame for the credit crunch we face today. One of the most popular terms in investment banking is “leveraging”. We hear the term used when referring to “leveraged accounts” or “leveraged
Investment Banking – Credit Default Swaps – Mortgage Backed Securities –
Keller Graduate School of Management
GM545 – Business Economics
The world of investment banking has changed since the recession of 2007-2008. The global impact of unregulated credit lending procedures, the Credit Default Swaps market, and mortgage-backed securities have crippled the economy and have called for regulations to bring economic stability back to the markets. Prior to the recession, investment banking was an idealized industry where bonuses equaled individual salaries, yet oversight was practically non-existent. This freedom allowed greed to lead carelessness, packaged with poor credit lending procedures, leading to the recession of 2007-2008 and the reformation of investment banking as we once knew it. Investment banking is a term assigned to the marketplace of buying and selling securities, underwriting, mergers and acquisitions, market making, foreign exchange, and buy-side and sell-side transactions. Investment banks are a financial institution that assists individuals, corporations, and governments in raising capital using various techniques on the buy and sell-side of the market. As of Oct. 11, 2008, towards the end of the recession, banking revenues within the United States make up 15% of the nation’s overall GDP. The total revenues of the ten largest investment banks total $495.371 billion. It should also be noted that the investment banking sector accounts for an almost 30% share of all profits made by US corporations. As we have drawn a relative picture to establish the size of the investment banking sector, let’s move onto understanding what role investment banks play in the credit lending system and assess how some of their strategies maybe to blame for the credit crunch we face today. One of the most popular terms in investment banking is “leveraging”. We hear the term used when referring to “leveraged accounts” or “leveraged
References: 1. Stone, Gerald W. Core Economics. New York, NY: Worth Pubishers, 2012. Print. 2. Rosenbaum, Joshua, and Joshua Pearl. "Chapt 4 - Leveraged Buyouts." Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons, 2009. 51-65. Print. 3. Mangoose, Dan. "Leveraging Leverage For Bigger Profits." Investopedia.com - Your Source For Investing Education. 24 Feb. 2011. Web. 15 Oct. 2011. <http://www.investopedia.com/articles/stocks/10/leverage-investing-strategy.asp#axzz1aov1CjhT>. 4. Morgenson, Gretchen. "Credit Default Swaps - The New York Times." Times Topics - The New York Times. 29 Apr. 2011. Web. 09 Oct. 2011. <http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?scp=1-spot>. 5. Gishen, Selwin. "Leverage 's "Double-Edged Sword" Need Not Cut Deep." Investopedia.com - Your Source For Investing Education. 11 Oct. 2009. Web. 10 Oct. 2011. <http://www.investopedia.com/articles/forex/08/forex-leverage.asp#axzz1aov1CjhT>.