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almaz saulebay

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Transcript of Banks

design by Dóri Sirály for Prezi
A bank
is a financial intermediary that accepts deposits and channels those deposits into lending activities,
either directly by loaning
or indirectly through capital markets.

A bank
links customers that have capital deficits and customers with capital surpluses.
Due to their importance in the financial system and influence on national economies, banks are
highly regulated
in most countries.

Most nations have institutionalised a system known as
fractional reserve banking
, under which banks hold liquid assets equal to only a portion of their current liabilities.

In addition to other regulations intended to ensure liquidity, banks are generally subject to
minimum capital requirements
based on an international set of capital standards, known as the Basel Accords.
• retail banks
, dealing directly with individuals and small businesses;
• business banks
, providing services to mid-market business;
• corporate banks
, directed at large business entities;
• private banks
, providing wealth management services to high net worth individuals and families;
• investment banks
, relating to activities on the financial markets.

Bank Types
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy.

The word bank
was borrowed in Middle English from Middle French
, from Old Italian
, from Old High German
, bank
"bench, counter"
Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.

Banks offer many different channels to access their banking and other services:

• Automated Teller Machines
• A branch
is a retail location
• Call center
• Mail:
most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements
• Mobile banking
is a method of using one's mobile phone to conduct banking transactions
• Online banking
is a term used for performing multiple transactions, payments etc. over the Internet
• Relationship Managers
, mostly for private banking or business banking, often visiting customers at their homes or businesses

• Telephone banking
is a service which allows its customers to conduct transactions over the telephone with automated attendant or when requested with telephone operator

• Video banking
is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch clarification

• DSA is a Direct Selling Agent
, who works for the bank based on a contract. Its main job is to increase the customer base for the bank.
Business model
A bank can generate revenue in a variety of different ways
The main method is via
charging interest
on the capital it lends out to customers.
Bank profit
= interest of loans - interest of deposits

is cyclical and dependent on
the needs and strengths of loan customers
the stage of the economic cycle.

financial advice
are more stable.
Therefore banks have placed more emphasis on these revenue lines
to smooth their financial performance.

Measures taken to ensure profitability

with investment and insurance houses.

2.Use of risk-based pricing :
higher interest rates to risky customers
lower interest rates to safe customers

3.Increasing the methods of payment to clients
(debit cards, smart cards, and credit cards).

charged to cardholders

• Credit risk:
if borrower does not make payments
• Liquidity risk:
if asset cannot be traded quickly to prevent a loss (or make the required profit).
• Market risk:
if the value of a portfolio will decrease in market .
• Operational risk:
risk arising from execution of a company's business functions.
• Reputational risk:
risk related to the trustworthiness of business.
• Macroeconomic risk:
risks related to the aggregate economy the bank is operating in.


Bank capital
is comprised principally of
retained earnings
subordinated debt.

The capital requirement
is a bank regulation, which sets a framework within which a bank or depository institution must manage its balance sheet.

The categorization of assets and capital is highly standardized so that it can be
risk weighted
Sub-types of retail banks
• Community bank
• Community development bank
• Private Banks
• Offshore banks

• Savings banks
accept savings deposits.
• Postal savings banks
are savings banks associated with national postal systems. Many nations' post offices operated or continue to operate postal savings systems to provide depositors who do not have access to banks a safe, convenient method to save money and to promote saving among the poor.

is a depository institution that is typically locally owned and operated. Community banks tend to focus on the needs of the businesses and families where the bank holds branches and offices. Lending decisions are made by people who understand the local needs of families, businesses and farmers.
From 1985 to 2004 they comprised 94% of all banks in the United States
A community bank
List of community banks

Beneficial State Bank of California
, Washington, and Oregon, also a CDFI

Consumers National Bank of Stark
, Carroll and Columbiana Counties in Ohio.

Community Bank
, N.A. of Upstate New York and Northeastern Pennsylvania, subsidiary of Community Bank System, Inc.
In the United States, community development banks (CDBs or CDFI Banks) are commercial banks that operate with a mission to generate economic development in low- to moderate-income (LMI) geographical areas and serve residents of these communities.
CDFI Banks provide retail banking services, they usually target customers from "financially underserved" demographics.
Community Development Banking in the United States
is banking, investment and other financial services provided by banks to private individuals who enjoy high levels of income or invest sizable assets.

The first banks in Venice were focused on managing personal finance for wealthy families
Private banking
Bank Country AUM(US$bn)
1 UBS Wealth Management Switzerland 1,966.9
2 Bank of America Global Wealth and
Investment Management USA 1,866.6
3 Morgan Stanley Wealth Management USA 1,454.0
4 Credit Suisse Private Banking &
Wealth Management Switzerland 888.2
5 RBC Wealth Management Canada 673.2
6 BNP Paribas Wealth Management France 395.1
7 Deutsche Asset & Wealth Management Germany 384.1
Offshore bank
is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.

typically include:

greater privacy

little or no taxation
(i.e. tax havens)

easy access to deposits
(at least in terms of regulation)

against local, political, or financial instability

Other advantages:
• can sometimes provide access to politically and economically
stable jurisdictions
However banks in developed countries offer the same in terms of stability
• may operate with a
lower cost base
and can provide
higher interest rates
due to lower overheads and a lack of government intervention.
However most offshore countries offer very similar interest rates

• can help developing countries source investment and create
growth in their economies

• Interest is generally paid
without tax being deducted
. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.

• offer
anonymous bank accounts
higher or lower rate loans
based on risk and investment opportunities not available elsewhere.
• often
, and therefore
costly to visit
, so physical access and access to information can be difficult.
This problem has been alleviated by online banking

• usually
more accessible to those on higher incomes
, because of the costs of establishing and maintaining offshore accounts.
However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts.

The Bank Secrecy Act
(Each person (including a bank) subject to the jurisdiction of the United States having an interest in, if the aggregate value of such accounts at any point in a calendar year exceeds $10,000).

• Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much
more exaggeration
Disadvantages of offshore banking
• Antigua and Barbuda • Bahamas
• Barbados • Belize
• Bermuda • British Virgin Islands
• Cayman Islands • Switzerland
• Channel Islands (Jersey, Guernsey, Alderney, Sark and Herm)
• Cook Islands • Curaçao
• Cyprus • Dominica
• Ghana • Isle of Man
• Labuan Territory, Malaysia • Liechtenstein
• Luxembourg • Malta
• Macau • Mauritius
• Monaco • Montserrat
• Nauru • Panama
• Saint Kitts and Nevis • Seychelles
• Singapore • Turks and Caicos Islands
List of offshore financial centres
Experts believe that as much as half the world's capital flows through offshore centers.

Among offshore banks,
Swiss banks
hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the
Cayman Islands
(1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits.

However, recent data by the Swiss National Bank show that the assets held by foreign persons in Swiss bank accounts
declined by 28.1%
between January 2008 and November 2009
Scope of offshore banking
• often
linked to offshore companies
, trusts or foundations, which may have specific tax advantages for some individuals.

• creates
tax and banking competition
• sometimes
less financially secure
. In a banking crisis in 2008, some savers lost funds that were not insured by the country in which they were deposited.

• has been associated in the past with the
underground economy
organized crime
, through
money laundering
Cooperative banking
is retail and commercial banking organized on a cooperative basis.

credit unions,
cooperative banks,
mutual savings banks,
building societies ,
mutual organizations,
Microcredit and microfinance
The more recent phenomena, and are often based on a cooperative model, focus on small business lending.
Cooperative banks
financial cooperatives,
democratically controlled
by its members (principle of one person, one vote),
operated for the purpose of
promoting thrift
and providing
other financial services
to its members.

Many credit unions also provide services intended to support
community development
sustainable international development
on a local level.

Credit unions are usually
entirely by member deposits, and avoid outside borrowing.

Credit unions :
cooperatives owned by the depositors and often offering rates more favorable than for-profit banks.
Credit unions
Larger institutions than Credit Unions.

Like credit unions
, are
owned by their customers
and follow the cooperative
principle of one person, one vote.

Unlike credit unions
, they provide services such as savings and loans
to non-members
as well as
to members
, and some
participate in the wholesale markets
for bonds, money and even equities.
Many cooperative banks are
traded on public stock markets
, with the result that they are partly owned by non-members(semi-cooperative).
is a financial institution
owned by its members
as a mutual organisation,
that offer banking services, esp
mortgage lending
found in the
United Kingdom
and several other countries.

The world's largest building society is
Britain's Nationwide Building Society.
is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families.
A building society
Cooperative banks
is a type of bank that provides services such as
accepting deposits
making business loans
, and
offering basic investment products

Commercial bank
serves corporations or large businesses
, as opposed to
individual members of the public
(retail banking).

After the great depression, commercial banks only
engage in banking activities
, whereas investment banks were limited to
capital markets activities
. This separation was mostly repealed in the 1990s.
A commercial bank
is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both). An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities).
Unlike commercial banks and retail banks, investment banks do not take deposits.

The two main lines of business in investment banking are called the sell side and the buy side. The "sell side" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.). The "buy side" involves the provision of advice to institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities.
An investment bank can also be split into private and public functions with an information barrier which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.
An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to U.S. Securities and Exchange Commission (SEC) andFinancial Industry Regulatory Authority (FINRA) regulation.
An investment bank
Organizational structure
Investment banking is split into front office, middle office, and back office activities. While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side investment firms such as boutique investment banks and small broker-dealers focus on investment banking and sales/trading/research, respectively.
Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, an activity very important to an investment bank's reputation. Therefore, investment bankers play a very important role in issuing new security offerings.

Core investment banking activities
Investment banking has changed over the years, beginning as a partnership form focused on underwriting security issuance, i.e. initial public offerings (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range including securities research, proprietary trading, and investment management. In the modern 21st century, the SEC filings of the major independent investment banks such as Goldman Sachs and Morgan Stanley reflect three product segments: (1) investment banking (fees for M&A advisory services and securities underwriting); (2) asset management (fees for sponsored investment funds), and (3) trading and principal investments (broker-dealer activities including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).
Front office
Front office is generally described as a revenue generating role.
There are two main areas within front office:
Investment Banking and Markets. Investment Banking involves advising the world's largest organisations on mergers, acquisitions, as well as a wide array of fund raising strategies. This is, on average, the most prestigious and highest paid department in the bank .
Markets are then split into further divisions; sales, trading, some research and also structuring. Though the average investment banker will make considerably more than the average trader, the best trader will make significantly more than the best investment banker.
Investment banking
Corporate finance is the traditional aspect of investment banks which also involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). This may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed "mergers and acquisitions". A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry – such as healthcare, public finance (governments), FIG (financial institutions group), industrials, TMT (technology, media, and telecommunication) – and maintains relationships with corporations within the industry to bring in business for the bank. Product coverage groups focus on financial products – such as mergers and acquisitions, leveraged finance, public finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt – and generally work and collaborate with industry groups on the more intricate and specialized needs of a client.
Sales and trading
On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In market making, traders will buy and sell financial products with the goal of making money on each trade. Sales is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading rooms, which can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics, computer science, mathematics and engineering Ph.D.s who act as quantitative analysts.
The equity research division reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. Investment banks typically have sell-side analysts which cover various industries. Their sponsored funds or proprietary trading offices will also have buy-side research. While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested trade ideas through the sales and trading division of the bank, and thereby generate revenue for the firm. Research also covers credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients but do not directly affect revenue. All research groups, nonetheless, provide a key service in terms of advisory and strategy. There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can affect the bank's profits.
Front and middle office
Risk management
Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades. Credit risk focuses around capital markets activities, such as loan syndication, bond issuance, restructuring, and leveraged finance. Market risk conducts review of sales and trading activities utilizing the VaR model and provide hedge-fund solutions to portfolio managers. Other risk groups include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis. Credit risk solutions are key part of capital market transactions, involving debt structuring, exit financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio hedging. Front office market risk activities provide service to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory. Well-known risk groups in JPMorgan Chase, Goldman Sachs and Barclays engage in revenue-generating activities involving debt structuring, restructuring, loan syndication, and securitization for clients such as corporates, governments, and hedge funds. J.P. Morgan IB Risk works with investment banking to execute transactions and advise investors, although its Finance & Operation risk groups focus on middle office functions involving internal, non-revenue generating, operational risk controls.[5][6][7] Credit default swap, for instance, is a famous credit risk hedging solution for clients invented by J.P. Morgan's Blythe Masters during the 1990s. The Loan Risk Solutions group[8] within Barclays' investment banking division and Risk Management and Financing group[9] housed in Goldman Sach's securities division are client-driven franchises. However, risk management groups such as operational risk, internal risk control, legal risk, and the one at Morgan Stanley are restrained to internal business functions including firm balance-sheet risk analysis and assigning trading cap that are independent of client needs, even though these groups may be responsible for deal approval that directly affects capital market activities. Risk management is a broad area, and like research, its roles can be client-facing or internal.
Middle office
This area of the bank includes treasury management, internal controls, and internal corporate strategy.
Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.
Financial control tracks and analyzes the capital flows of the firm, the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses via dedicated trading desk product control teams. In the United States and United Kingdom, a comptroller (or financial controller) is a senior position, often reporting to the chief financial officer.
Internal corporate strategy tackling firm management and profit strategy, unlike corporate strategy groups that advise clients, is non-revenue regenerating yet a key functional role within investment banks.
This list is not a comprehensive summary of all middle-office functions within an investment bank, as specific desks within front and back offices may participate in internal functions.
Back office
This involves data-checking trades that have been conducted, ensuring that they are not wrong, and transacting the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank.
Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes.
Firms are responsible for compliance with local and foreign government regulations and internal regulations.
Other businesses
• Global transaction banking is the division which provides cash management, custody services, lending, and securities brokerage services to institutions. Prime brokeragewith hedge funds has been an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008.
• Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g., real estate), to meet specified investment goals for the benefit of investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g., mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as private wealth management and private client services.
• Merchant banking can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy. Merchant banking is also a name used to describe the private equity side of a firm.[11] Current examples include Defoe Fournier & Cie. and JPMorgan's One Equity Partners and the original J.P. Morgan & Co. Rothschilds, Barings, Warburgs and Morgans were all merchant banks. (Originally, "merchant bank" was the British English term for an investment bank.)

Industry profile
There are various trade associations throughout the world which represent the industry in lobbying, facilitate industry standards, and publish statistics. The International Council of Securities Associations (ICSA) is a global group of trade associations.
In the United States, the Securities Industry and Financial Markets Association (SIFMA) is likely the most significant; however, several of the large investment banks are members of the American Bankers Association Securities Association (ABASA) while small investment banks are members of the National Investment Banking Association (NIBA).
In Europe, the European Forum of Securities Associations was formed in 2007 by various European trade associations. Several European trade associations (principally the London Investment Banking Association and the European SIFMA affiliate) combined in 2009 to form Association for Financial Markets in Europe (AFME).
In the securities industry in China (particularly mainland China), the Securities Association of China is a self-regulatory organization whose members are largely investment banks.
Global size and revenue mix
Global investment banking revenue increased for the fifth year running in 2007, to a record US$84.3 billion,[14] which was up 22% on the previous year and more than double the level in 2003. Subsequent to their exposure to United States sub-prime securities investments, many investment banks have experienced losses. As of late 2012, global revenues for investment banks were estimated at $240 billion, down about a third from 2009, as companies pursued less deals and traded less.[15] Differences in total revenue are likely due to different ways of classifying investment banking revenue, such as subtracting proprietary trading revenue.
In terms of total revenue, SEC filings of the major independent investment banks in the United States show that investment banking (defined as M&A advisory services and security underwriting) only made up about 15-20% of total revenue for these banks from 1996 to 2006, with the majority of revenue (60+% in some years) brought in by "trading" which includes brokerage commissions and proprietary trading; the proprietary trading is estimated to provide a significant portion of this revenue.[3]
The United States generated 46% of global revenue in 2009, down from 56% in 1999. Europe (with Middle East and Africa) generated about a third while Asian countries generated the remaining 21%.[14]:8 The industry is heavily concentrated in a small number of major financial centers, including City of London, New York City, Frankfurt, Hong Kong and Tokyo.
According to estimates published by the International Financial Services London, for the decade prior to the financial crisis in 2008, M&A was a primary source of investment banking revenue, often accounting for 40% of such revenue, but dropped during and after the financial crisis.[14]:9 Equity underwriting revenue ranged from 30% to 38% and fixed-income underwriting accounted for the remaining revenue.[14]:9
Revenues have been affected by the introduction of new products with higher margins; however, these innovations are often copied quickly by competing banks, pushing down trading margins. For example, brokerages commissions for bond and equity trading is a commodity business but structuring and trading derivatives has higher margins because each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. One growth area is private investment in public equity (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors.
Banks also earned revenue by securitizing debt, particularly mortgage debt prior to the financial crisis. Investment banks have become concerned that lenders are securitizing in-house, driving the investment banks to pursue vertical integration by becoming lenders, which is allowed in the United States since the repeal of the Glass-Steagall Act in 1999.
Top 10 banks
The ten largest investment banks as of December 31, 2013, are as follows (by total fees from all advisory). The list is just a ranking of the advisory arm of each bank and does not include the generally much larger portion of revenues from sales and trading and asset management.
Rank Company Fees ($m)
1. J.P. Morgan & Co. 6,271.74
2. Bank of America Merrill Lynch 5,685.59
3. Goldman Sachs 5,053.21
4. Morgan Stanley 4,452.99
5. Citigroup 3,952.09
6. Deutsche Bank 3,616.12
7. Credit Suisse 3,545.45
8. Barclays 3,454.73
9. Wells Fargo 2,277.99
10. RBC Capital Markets 2,041.80
World's biggest banks are ranked for M&A advisory, syndicated loans, equity capital markets and debt capital markets.
The Financial Times, The Wall Street Journal and Bloomberg often cover mergers and acquisitions and capital markets. League tables are also available:
• Investment Banking Review, The Financial Times.
• Investment Banking Scorecard, The Wall Street Journal.
• Global M&A Financial Advisory Rankings, Bloomberg.
• Global Capital Markets League Tables, Bloomberg.
Financial crisis of 2008
The 2008 financial credit crisis led to the notable collapse of several banks, notably including the bankruptcy of large investment bank Lehman Brothers and the hurried sale of Merrill Lynch and the much smaller Bear Stearns to banks which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was rescued by government loans through the Troubled Asset Relief Program (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief.[18] Similar situations occurred across the globe with countries rescuing their banking industry. Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets. Eventually, taxpayer assistance to banks reached nearly $13 trillion, most without much scrutiny, lending did not increase and credit markets remained frozen.
The crisis led to questioning of the business model of the investment bank without the regulation imposed on it by Glass-Steagall.[neutrality is disputed] Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton administration and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit. Formerly, the guidelines said that in order to take a company public, it had to be in business for a minimum of five years and it had to show profitability for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the full impact of the change.

A number of former Goldman-Sachs top executives, such as Henry Paulson and Ed Liddy were in high-level positions in government and oversaw the controversial taxpayer-funded bank bailout. The TARP Oversight Report released by the Congressional Oversight Panel found that the bailout tended to encourage risky behavior and "corrupt[ed] the fundamental tenets of a market economy".
Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas banks, hedge funds and pensions.[26] The same year it received $10 billion in aid from the government, it also paid out multi-million dollar bonuses; the total paid in bonuses was $4.82 billion. Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion in bonuses.
Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained by New York Times' Wall Street Business columnist Joe Nocera alleged that IPOs managed by Goldman Sachs and other investment bankers involved asking for kickbacks from their institutional clients who made large profits flipping IPOs which Goldman had intentionally undervalued. Depositions in the lawsuit alleged that clients willingly complied with these demands because they understood it was necessary in order to participate in future hot issues. Reuters Wall Street correspondent Felix Salmon retracted his earlier, more conciliatory, statements on the subject and said he believed that the depositions show that companies going public and their initial consumer stockholders are both defrauded by this practice, which may be widespread throughout the IPO finance industry. The case is ongoing, and the allegations remain unproven.
Investment banking is often criticized for the enormous pay packages awarded to those who work in the industry. According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their executives from 2003 to 2008, "while they presided over the packaging and sale of loans that helped bring down the investment-banking system."
The highly generous pay packages include $172 million for Merrill Lynch & Co. CEO Stanley O'Neal from 2003 to 2007, before it was bought by Bank of America in 2008, and $161 million for Bear Stearns Co.'s James Cayne before the bank collapsed and was sold to JPMorgan Chase & Co. in June 2008.
Such pay arrangements have attracted the ire of Democrats and Republicans in the United States Congress, who demanded limits on executive pay in 2008 when the U.S. government was bailing out the industry with a $700 billion financial rescue package.
Writing in the Global Association of Risk Professionals, Aaron Brown, a vice president at Morgan Stanley, says "By any standard of human fairness, of course, investment bankers make obscene amounts of money."
The investment banking industry, and many individual investment banks, have come under criticism for a variety of reasons, including perceived conflicts of interest, overly large pay packages, cartel-like or oligopolic behavior, taking both sides in transactions, and more. Investment banking has also been criticised for its opacity.
Conflicts of interest
Conflicts of interest may arise between different parts of a bank, creating the potential for market manipulation, according to critics. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a "Chinese wall" to prevent communication between investment banking on one side and equity research and trading on the other. Critics say such a barrier does not always exist in practice, however.
Conflicts of interest often arise in relation to investment banks' equity research units, which have long been part of the industry. A common practice is for equity analysts to initiate coverage of a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings for investment banking business. Alternatively, companies may threaten to divert investment banking business to competitors unless their stock was rated favorably. Laws were passed to criminalize such acts, and increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble after the dot-com bubble.
Philip Augar, author of The Greed Merchants, said in an interview that, "You cannot simultaneously serve the interest of issuer clients and investing clients. And it’s not just underwriting and sales; investment banks run proprietary trading operations that are also making a profit out of these securities."
Many investment banks also own retail brokerages. During the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
Since investment banks engage heavily in trading for their own account, there is always the temptation for them to engage in some form of front running – the illegal practice whereby a broker executes orders for their own account before filling orders previously submitted by their customers, there benefiting from any changes in prices induced by those orders.
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