As with commercial banks, investment banks are highly leveraged entities that play important roles in both the primary and secondary markets. Investment banking activities include:
•Raising funds through public offerings and private placement of securities. •Trading of securities.
•Mergers, acquisitions, and financial restructuring advising. •Merchant banking.
•Securities finance and prime brokerage services.
The first role is assisting in the raising of funds by corporations, U.S. government agencies, state and local governments, and foreign entities (sovereigns and corporations). The second role is assisting investors who wish to invest funds by acting as brokers or dealers in secondary market transactions. We can classify investment banking into two categories:
•The large investment banks are affiliated with large commercial bank holding companies. Examples of bank holding companies, referred to as bank-affiliated investment banks, are Banc of America Securities (a subsidiary of Bank of America), JPMorgan Securities (a subsidiary of JPMorgan Chase), and Wachovia Securities (a subsidiary of Wells Fargo), and Goldman Sachs. •The second category of investment banks, referred to as independent investment banks, is a shrinking group. As of mid-2008, this group includes Greenhill & Company and Houlihan Lokey Howard & Zukin.
Another way of classifying investment banking companies is based on the types of activities in which they participate: full-service investment banks and boutique investment banks. The former are active in a wide range of investment banking activities while the latter specialize in a limited number of those activities. In assisting entities in the raising of funds in the public market, investment bankers perform one or more of the following three functions:
•In their advisory role, investment bankers may be required to design a security structure that is more appealing to investors than currently...