What Really Happens In An Investment Bank
Heard of the invisible hands that played a big role in the financial crisis that lead to widespread loss of jobs and livelihood? Those invisible hands—the investment banks seems to have almost all of Washington hooked to them and yet their work is the most difficult to be understood. Those whoever are associated with these banks seems to be a millionaire. You must have heard of Morgan Stanley, Lazards or Goldman Sachs and more recently another big name called Lehman Brothers, the Bear Stearns and Merrill Lynch. It takes centuries to build such rapport and name in the industry that is the reason why MBA graduates and Ivy league business majors envy them. Investment banks are different from saving banks which most people are associated with and a glimpse of their activity will make you understand better.
For a better grasp of what we are about to learn let us section it into four distinct subtopics: Investment Banking; Sales and Trading; Operations; and Capital Markets which are the major mode of operations of such banks.
An analysis of their mode of functioning and the personalities behind the functioning and to be more interesting—the money they earn will help us better understand what exactly an investment bank does.
Let us first have a look at a picture of an investment banker. Specializing in an industry or any other category like Mergers and Acquisitions are a hallmark of investment bankers. They unlike traders are reserved and act calm and dressed in such a way. Unbuttoning a shirt collar is not in their protocol. Those working with Mergers and Acquisitions acts like financial advisors for companies, for which the fees are sky high. Services they provide include companies raise capitals, acquire other companies or make private companies public.
Investment bankers make money when money shifts hands from one business to other. It may be the case of acquisition of a new company or fundraising their primary aim is to make sure the corporate moves their money. A tool to do this is the so called pitch-books wherein the bankers present small ideas, sometimes hundreds of them, to infuse companies with motivation on what they should do. Out of the hundreds of pitch-books, few will shape into real work and to generate those numerous ideas a banker has to sacrifice some amount of sleep and luxurious naps. If the investment banker is at the lower rung of hierarchy then he gets the least sleep and works harder, this will eventually become less as one moves up the ladder from an analyst, from where one starts, to associate and if the work record is good the vice president followed by the director and for very few lucky fellows, the Managing Director.
Now if we talk about how much they earn, an estimate of 2010 suggests that an analyst earns as much as 70,000 USD as salary plus a bonus of 80%. A work hour of 90–120 hours of work in a week is expected during the tenure of as an analyst. If you spend a good time of 2 years as analyst then the next level is the Associate where an MBA degree counts. As an associate a salary of 100,000 USD can be expected with the same bonus perks associated with an analyst. Being a vice president entitles you to a whooping half a million in your pocket. Now comes the Managing director and you have a chance of earning 8–10 million in a year. Moving up the ladder entitles you to certain restrictions too, as there are sensitive information associated with pitch-books regular mingling with people who can steal the ideas are a no no.
Apart from bankers and salesman traders forms an entirely unique group. Although traders and salesman work on the same floor they have their own signature moves and appearance that has been imposed by their style of work. Traders specialize in special sections or trades for their client and the market are followed strictly so that they have the ability to customize certain plans for their client. Traders are a group that is near extinction which is mainly due to Dodd-Frank bill and the Volcker Rule.
If you want to identify traders, they are the men with their sleeves rolled up and have bad tempers with the phones on their desk. Most of the time a grumpy attitude towards animate and inanimate objects around their work table but generous on donuts that is stocked in massive boxes.
Contrary to the traders, salesman carefully and tactfully handles objects around them and seems to know exactly where a mute button is on a telephone that they hold whether it is new or it is an old one. Pressing the mute button is their passion and are the people who work late to negotiate a deal. Working with multiple task at the same moment with different clients and fellows yet delivering the right message to each one of them—that is the efficiency of a salesman.
Person involved in sales has a different way of making money as their bonuses depend largely on their ability to get clients and how are they performing in the market. Though they have a fairly same salary with their colleagues in banking they can make a killing in terms of making money which is an extra edge. If a trader is good enough he or she can make more money than a CEO of a reputed bank, one good example is Michael Milken of Solomon Brothers.
If a banker needs to raise debt the capital market professionals comes into play. Let us say for example an XYZ company has a plan of raising $15 billion in debt along with a short maturity and wants to calculate the cost of it, then the investment banker will consult with the capital market guys which will collaborate with a specialized group called “Syndicate” to set the market price of securities for the banker. As the capital market professionals need to chart out such plans they need to keep a keen eye on the way the market is functioning. They earn slightly less than a banker but play a big role in moving money in the market.
If at all any bank sector resembles a traditional company then you can look upon the operations professionals. As the name suggests this section manages the legal framework, management, administration etc. Most of the reputed banks have a separate building for such work which handles the processes and paperwork for the trades and agreements. The people at operations earn very much less than those working in the actual trading and banking scenario.
This article will be a sure shot first step to understanding how investment bank works. Although there are numerous other steps that are involved in the sector its complexities can only be understood with further reading, nonetheless the information given above will make you wiser on the topic.