Investment Banking
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Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert Shiller at Yale University
February 4, 2010
Investment Banking
The term bank is misleading since this is often used in everyday life
as a synonym for a depository institution. A depository institution is
an institution that accepts deposits from individuals and companies and
later on the owner can take the money back at an interest. Meanwhile the
institution makes loans, or invest the money at higher interest rates
than they give out on the deposits and that is how they make a profit
(e.g. a savings- ,savings and loan- or commercial bank).
Historically and at
present however a majority of institutions do both. Investment banking
means the underwriting of securities. They arrange for the issuance by
other institutions of securities (i.e. if Ford Motor Company would want to issue
new shares or bonds they would go to an investment bank and the investment bank would
underwrite the issuance).
A pure investment bank is not a depository
institution, nor is it a broker/dealer because they are not trading in
securities although they would deal in securities as part of the
underwriting process.
The Glass-Steagall Act of 1933
The stock market crashed in 1929 causing tremendous chaos in the
financial markets. Carter Glass (D), a senator from Virginia, and Henry
Steagall (D), a representative from Alabama, put together a bill that
passed congress and was signed by President Roosevelt that was designed
to control speculation and basically stated that investment banking
cannot be combined commercial banking or insurance. (e.g. J.P. Morgan & Co,
one of the biggest banks of the US, which was founded by James Pierpont Morgan was
informed that it had to chose whether it wanted to be an investment bank or a commercial
Notes on investment banking prepared by Jacob Westerberg on a lecture by professor Robert...
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