Lecture on Investment Banking

Introduction

• Speaker: Professor with guest speaker Jon Fougner
• Topic: Investment Banking
• Distinction: Different from commercial banking
• Historical Context: Term became significant in the 1930s

Basics of Investment Banking

• Function: Helps businesses create and issue securities (stocks, bonds)
• Clients: Corporations (for-profit and non-profit), governments, individuals
• Role: Acts as a consultant with financial backing
• Difference from Consulting: Offers money alongside advice
• Difference from Trading: Focus on creating and enabling growth
• Difference from Commercial Banking: Pure investment banks do not accept deposits

Underwriting of Securities

• Purpose: Manage issuance of new shares
• IPO: Initial Public Offering for private companies going public
• Seasoned Offering: Issuance of additional shares by already public companies
• Types of Underwriting Deals:
  • Bought Deal: Bank buys and resells shares
  • Best Efforts: Bank makes best effort to sell shares
• Regulation: By Securities and Exchange Commission (SEC)

Moral Hazard and Trust

• Investment banks solve moral hazard issues by due diligence
• Built around reputation and trust
• Investment bankers perceived as cultivated and impressive

Goldman Sachs - A Case Study

• Historical Significance: Highly respected investment bank
• Book Reference: "The Partnership" by Charles Ellis
• Principles by John Whitehead
  • Client interests first
  • Assets: People, capital, reputation
  • Emphasis on excellence, creativity

Financial Crises and Regulatory Changes

• Glass-Steagall Act (1933): Separated investment and commercial banking
• FDIC Creation: Insured commercial banks
• Gramm-Leach-Bliley Act (1999): Repealed Glass-Steagall, allowed universal banking
• Financial Crisis 2007-2009: Led to Dodd-Frank Act
• Volcker Rule: Limits proprietary trading by commercial banks
• Lincoln Rule: Restricts access to Fed discount window for swap dealers

Shadow Banking

• Definition: Non-regulated entities acting like banks
• Example: Lehman Brothers collapse
• Impact on Financial Crisis: Involvement in subprime securities and repos

Jon Fougner’s Investment Banking Experience

• Background: Former analyst at Goldman Sachs
• Career Path: Transition to Facebook
• Banking Role: Involved in transaction modelling, mergers, and IPOs
• Skills Developed:
  • Process management
  • Presentation skills
  • Data analysis

Transition to Facebook

• Role: Local Inbound Product Marketing
• Focus: Social advertisement strategy
• Core Mission: User experience focus
• Corporate Culture: Creative and fast-paced

Student Q&A

• Discussion on career choices, value alignments, and educational pathways

Conclusion

• Key Takeaway: Investment banking is about managing financial transactions and building trust, while navigating regulatory environments and adapting to industry changes.
• Future Prospects: Financial innovation and regulatory adaptation continue to shape the landscape.