Industry Overview: Investment Banking
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and withdraw money) and investment banks (that work with companies and governments to raise and invest money) was repealed in 1999, it caused tremendous upheaval in the industry.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.
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.
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.
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.
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.
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.
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.
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."
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.
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.
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.
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.
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 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 bymagazine. 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).
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."