About Corporate Investment Banking

Significance

• Investment banks are essentially giant financial intermediaries. Their primary purpose is to connect investors with companies that need money. They provide individualized advice to all parties, cultivating close relationships, expertise and knowledge about market conditions. Different departments of investment banks often work with one another, but at the same time, there are many informational barriers between departments, due to confidentiality requirements in private transactions.
  
  

Function

• From a broad perspective, investment banks make the entire economy run more efficiently. They provide critical financial and advisory services to the largest and most influential multinational companies in the world. The largest investment banks--the so-called bulge bracket--have very well established institutional relationships that help them to raise capital both quickly and efficiently. The investment banking business model is challenging for outsiders to understand, but simply put they connect large companies who need capital with institutional investors that have enough money and access to credit to provide it.
  
  

Features

• Modern investment banking relies heavily on abstract mathematical valuation models that it uses to evaluate companies and project their performance into the future. These banks apply methods derived from complex accounting, market data, independent research and historical precedent to their corporate clients and use them to help make large transactions go through more easily. In the equities section, complex trading operations seek to make money for clients using both short-term and long-term trading strategies.
  
  

Considerations

• In recent years, many investment banks have lost a good deal of both credibility and money due to massive problems in the credit markets. The mathematical valuation models upon which the business has been based have begun to erode due to massive fundamental changes in the workings of the market and unprecedented global government intervention. While the investment banking business model still survives, two of the most prestigious firms--Lehman Brothers and Bear Sterns--collapsed in late 2008 due to the excessive use of leverage.
  
  

Potential

• Despite the troubles in corporate investment banking, the general business model is still fundamentally sound, and will restructure and prosper in the future. So long as there are large corporations, there will be investment banks to provide financial services to them. It's a widely misunderstood business, but it provides essential advisory roles that ensure the efficient allocation of global capital to both established corporations and emerging, dynamic companies from around the world.