Investment banks are institutions engaged in maintaining a healthy financial system in society. By the definition of the US Small Business Administration, they are “businesses specializing in the formation of capital…. done by outright purchase and sale of securities offered by the issuer, standby underwriting, or "best efforts selling”. In this way, investment banks secure the flow of capital from those that have accumulated significant funds to those offering attractive investment opportunities.
The most important role of the banks is to ensure the effective functioning of securities in the economy, with securities meaning stocks, bonds, and more complex instruments such as derivatives of all kinds. Today, investment banks provide a variety of services to corporations, investment funds, and even non-profits. They also engage in trading of foreign currencies, commodities, bonds, and equities. During an IPO, an investment bank will underwrite the securities issued and secure their placement with private investors and general public through stock exchanges.
They will provide therefore a service that secures them great influence among corporate managers all over the world. The beginnings of investment banking date to the late 18th – early 19th century when Wall Street began to rise to prominence as a way to attract investment in the United States’ vast natural riches. Accumulation and proper channeling of capital was essential for the explosive growth of young capitalist economy. Banks have led the nation through the consolidation stage of its business, securing capital for the formation of trusts in the late 19th century.
These years mark the formation of major investment banks that have made a breakthrough in gathering funds for emerging economic giants. One of the greatest landmarks in the history of investment banking was the Glass-Steagall Act adopted in the wake of the Wall Street Crash of 1929. this act realized the borderline between commercial and investment banking, forbidding banks to perform both deposit operations and security placements. This act was repealed and the borderline removed when in 1999 the Gramm-Leach-Bliley Act was adopted.
This caused a reshuffle in the practices of investment banks, expanding the scope of their activities. Goldman Sachs was founded in 1869. As reflected in the name of the firm, it was founded by Marcus Goldman who was a Jewish immigrant to the US, born in Germany in 1821. Today, the firm has achieved prominence in the whole world and dominates M&A market for investment banking services in Germany itself. This was hardly the goal of the Jewish immigrant, the son of a cattle trader, as he opened his bank in Pine Street in Lower Manhattan.
In its early years, the initiatives of Goldman seemed less ambitious; however, they represented considerable breakthroughs for those times. Thus, in the 1870s, the bank initiated “use of commercial paper for entrepreneurs” (Wikipedia, 2006). As the founder’s son-in-law Samuel Sachs joined the bank, the name was changed to include his last name as well. In 1896, Goldman Sachs became a member of the New York Stock Exchange. In the early 20th century, Goldman Sachs became a leading player in the emerging IPO market on Wall Street.
The bank introduced a large number of important initiatives that helped shape investment banking as an activity and make it what it is today, such as the application of price/earnings ratio to the evaluation of potential investments and audit of financial information. Although the bank approached collapse in the crisis of 1929, it survived and proceeded to become the world’s leading investment banking institution as it is known today, advising multibillion-dollar acquisitions and IPOs.
- Geisst, C.R. (2004). Wall Street: A History from Its Beginnings to the Fall of Enron. New York: Oxford University Press. Goldman Sachs. Our Firm. Retrieved November 26, 2006, from http://www2. goldmansachs. com/careers/about_goldman_sachs/articles/about_goldman_sachs_963730. html
- US Small Business Administration. Investment Banking: Definition. Retrieved November 26, 2006, from http://www. sba. gov/smallbusinessplanner/index. html
- Wikipedia. (2006). Goldman Sachs. Retrieved November 26, 2006, from https://www.wikipedia.org/