Investment banking history
The part of banking that is concerned with securities underwriting and trading as well as other specialized financial services. Most investment banking activities charge a fee for their services, unlike traditional commercial banking, which relies upon the spread, or difference, between interest paid on deposits and the interest earned on loans.
The industry began in the early part of the 19th century when private banks began to help companies sell stock to the public. Investment banking firms that began before the Civil War included Riggs & Co., CLARK DODGE & CO., Alex. Brown & Co., and Vermilye & Co. Prior to the Civil War, investment banks were crucial in selling TREASURY BONDS during wartime. The bestknown bank engaging in this specialty was Jay Cooke & Co.
Traditionally, investment banking encompassed the underwriting of new securities and advising companies on MERGERS and acquisitions. After the Civil War, many investment banks underwrote securities for the RAILROADS, enabling them to expand westward to California and link major markets. After the 20th century began, investment banking expanded to include trading in the money market and the sale and trading of securities in the secondary markets such as the NEW YORK STOCK EXCHANGE. After a congressional inquiry in 1912, many banks organized themselves by founding the Investment Bankers Association, the first trade group dedicated to the industry. The group was later renamed the Securities Industry Association. Prior to the 1930s, investment banking was part of the general service of banking for companies, practiced along with COMMERCIAL BANKING or private banking under the same roof. Those operations that were solely for the brokerage or sale of securities were practiced by stockbrokers.
The modern investment banking industry inadvertently was created by the Banking Act (Glass-Steagall Act) of 1933, which forced a separation between commercial and investment banks. Many banks that engaged in investment banking divested their security affiliates in order to comply with the law, and the modern investment banking industry was born. Notable investment banks created at the time included MORGAN STANLEY & CO. and the First Boston Corp. In the 1950s and 1960s, traditional stockbrokers such as Merrill Lynch began to expand into the full array of investment banking services and helped revolutionize the business by making the services available to the small, or retail, investor. Until that time, investment banks never dealt with the public but only with companies. The only exception had been the private banks, which catered to wealthy individuals.
Most investment banks remained partnerships until the 1970s, when they slowly began to sell stock and go public. Increased need for capital and an expanding marketplace made partnerships obsolete; by 1999 no significant private investment banks remained after GOLDMAN SACHS went public that year. When the Financial Modernization Act was passed in 1999, it allowed mergers between commercial bank holding companies and securities firms again for the first time in more than 60 years. The merger of CITIBANK with Travelers Insurance in 1998 was the first of its type in the post-1933 era because Travelers already owned investment banks Smith Barney & Co. and SALOMON BROTHERS, bringing both under the Citigroup banner.
See also DILLON READ & CO.; DREXEL BURNHAM LAMBERT; KIDDER PEABODY & CO.; MORGAN, JOHN PIERPONT; SELIGMAN & CO., J. & W.
Further reading
- Carosso, Vincent. Investment Banking in America: A History. Cambridge, Mass.: Harvard University Press, 1971.
- Geisst, Charles R. The Last Partnerships: Inside the Great Wall Street Money Dynasties. New York: McGraw-Hill, 2001.