Market Overview

What Does An Investment Banker Actually Do?

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What Does An Investment Banker Actually Do?

The concept of a banker is a fairly simple one. Banks and bankers make money by lending money to people and businesses and charging interest on those loans as well as fees on services they provide for depositors. The largest U.S. banks are investment banks, and investment bankers do a lot more than accept deposits and make loans.

What Do Investment Banks Do?

Investment banks provide financial advisory services for companies and governments. When countries and companies need to raise money, they often hire an investment bank to help in the process.

The type of services investment banks provide can include anything from bond issuance and sales to public stock offerings to merger and acquisition deals to asset sales to private placements. Investment banks negotiate deals, identify willing participants, complete the necessary paperwork and ensure legal and regulatory standards are met. They play an important role in accurately pricing assets and facilitating economic growth.

What Do Investment Bankers Do?

The job of investment bankers is essentially to serve as asset salespeople. Rather than vacuum cleaners or Girl Scout cookies, investment bankers sell corporate assets, equity ownership stakes and even cash itself. In the case of bonds and loans, an investment banker is hoping investors will fork over large amounts of cash upfront in exchange for the possibility of getting a larger amount of cash in the future via interest payments.

As part of that process, investment bankers are responsible for assessing the risks and potential benefits of these transactions and compiling a prospectus to use as a sales pitch to potential investors. Once the prospectus is complete, the trading and sales staffs at the investment banks are responsible for contacting mutual funds, hedge funds, wealthy individuals and governments and convincing them to buy whatever it is the bank is selling.

Why So Much Hate?

There’s nothing inherently wrong with or nefarious about investment bankers and investment banks, yet the industry has a terrible public reputation thanks to all of the times in the past the industry has gone off the rails and created dangerous situations.

The most obvious recent example is the 2008 financial crisis, when the entire U.S. economy nearly collapsed thanks to banks making risky mortgage loans to subprime borrowers and then turning around and selling those risky loans to mortgage-backed securities investors at a hefty premium.

Investment banks such as Bank of America Corp (NYSE: BAC) and Citigroup Inc. (NYSE: C) are so large they're considered to be “systemically important” to the financial system, or “too big to fail.” At their size, the collapse of a single bank could create so much chaos in the financial system that it could create a domino effect and drag down all other banks, as the theory goes.

A Disturbing Trend

Following the 2008 financial crisis, a wave of new financial regulations, particularly Dodd-Frank and the Consumer Protection Act, were enacted to help keep investment banks in check and prevent the type of reckless behavior that led to the crisis. Unfortunately for bank investors, those regulations created a difficult environment for banks to grow profits. The Trump administration has made financial deregulation a top priority, and Trump signed a bill into law in May that scales back the reach of the Dodd-Frank legislation.

While that regulation frees up banks to be more aggressive in growing profits, it also once again raises the concern that irresponsible banks could put the entire financial system at risk.

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