44. Investment bank services: assist companies involved in mergers and acquisitions (m&a).

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities.  An investment bank may also assist companies with mergers and acquisitions and may provide support services in market making and trading of various securities.  The primary services of an investment bank include: corporate finance,  M&A, equity research, sales & trading, and asset management.  

Investment banks earn profit by charging fees and commissions for providing these services and other kinds of financial and business advice.

• Investment banks play an important role from the moment companies contemplate an acquisition to the final steps.  When a buyer or seller contemplates an acquisition, the respective board of directors may choose to form a special committee to evaluate the merger proposal, and typically retains an investment bank to advise and evaluate the transaction’s terms and price as well as help the acquiring company arrange financing for the deal.

• To provide meaningful advisory, investment banks create different valuation models  to determine valuation ranges for a company.  They may also conduct accretion/dilution analysis to assess affordability to the acquirer and the effect of the consideration paid on projected earnings per share.   Banks also help clients assess synergistic opportunities from acquiring other companies and how those synergies can create value and reduce costs in the future.  A buy side M&A advisor represents the acquirer and determines how much the client should pay to buy the target.  A sell side M&A advisor represents the seller and determines how much the client should receive from the sale of the target.

Many investment banks strongly promoted multi-billion dollar M&A's, which during the boom years inflated the stock market, and created huge profits for investment banks. Some financial conglomerates expanded their investment banking operations during the 'high' times, at the expense of retail banking. The benefits of M&A's are not always obvious, as many companies are left with massive debts that are difficult to repay in an economic

downturn. In addition, research shows that problems in merging corporate cultures contribute to merger failure rates of over 60%. After the stock market bubble, M &A activity slowed down, but has recently rebounded.

45. Investment bank services: secondary services (such as market making).

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities.  An investment bank may also assist companies with mergers and acquisitions and may provide support services in market making and trading of various securities.

An investment bank is an institution that acts as an underwriter or agent for companies or governments that issue securities (bonds and stocks). They thus act as “market makers,” or intermediaries between potential investors and companies or governments that wish to raise capital.

Market maker is a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price.

the underwriting firm may also get rights to buy additional securities at a specified price, or receive a membership on the board of directors of the issuing company. The underwriting firm frequently becomes a market maker in the new security, keeping an inventory and providing a firm bid and offer price for the new security to provide a secondary market so that investors can buy or sell the new securities after the primary sale. Providing liquidity for investors increases the value of the primary offering, since few investors would buy the new security if they couldn't sell it at will.

46. Investment bank services: secondary services (such as trading of derivatives).

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities.  An investment bank may also assist companies with mergers and acquisitions and may provide support services in market making and trading of various securities (including derivatives).

There are 5 ways investment banks make money as dealers in OTC derivatives:

1. Volume.  The immense growth of OTC flow trading means that the dealers make big money if they can professionally intermediate these massive flows, measuring in the trillions.  This involves putting capital at risk so it can and does go wrong, and professionally making tight, competitive markets across multiple instruments.

2. Economies of scale.  While there are conventional economies of scale in areas such as systems, operations, and counterparty credit management, and a subsidized cost of capital by Uncle Sam, the really valuable economies of scale exist on the order flow side.  As the industry consolidates and market share increases, by definition the dealer sees more of the flows.  This assists in managing risk, and, enables the dealer effectively to “front run” the flow for its own trading book.  Such front running would be illegal in an agency driven brokered market such as the NY Stock exchange (until the advent of high frequency trading and dark pools – but that’s another story).  But in OTC markets, there is no pretext of such “front running” being illegal.  It’s barely seen as unethical.  It makes a lot of money for Wall Street.  There is a reason why more large hedge funds and corporations haven’t screamed bloody murder at the derivatives practices of Wall Street.  They are dependent upon them.  This represents a dangerous accumulation of power that should be addressed by our government.

3. Proprietary Trading.  Dealers speculate on numerous risks associated with managing OTC derivatives books, and utilize the advantage their market making role provides them in seeing the flows.  It is ludicrous to suggest that this activity can be separated from market making.

4. Complexity.  Wall Street always seeks to add complexity to the derivatives business.  On the one hand, this allows tailoring of sophisticated risk profiles, often the well-intended desire to meet client needs.  Complexity also allows high margin trades, as they are by nature, structured and negotiated rather than done via a more competitive process.  It must be said that some complexity is intended to deceive and gouge clients.  The more complex, the more buyers had better beware.

5. Cheating.  Occasionally, Wall Street opportunists seize opportunities to cheat, some might say steal.  This is done either by direct lying, or by misleading clients into trades they don’t know how to price fairly.  This is different than the ethical and at times legal issue of selling a “client” a risky position that they don’t understand how to price or manage for the multi year life of the transaction.  Unwinding such trades when the client realizes the disaster is often a second opportunity to gouge, the deepest cut of all.

The percentage of money-making methods 1 to 5 above that main investment banks realizes over time, it would be 30%, 20%, 25%, 20%, 5% respectively.