Investment banks do. Investment activity and banking activities

And governments raise capital in global financial markets, and also provides advisory services for the purchase and sale of businesses, brokerage services, being a leading intermediary in the trading of stocks and bonds, derivatives, currencies and commodities, and also issues analytical reports on all markets, on which he operates.

Activities

A typical investment bank has the following functions:

• Underwriting and Securities Trading;
• Offering brokerage services to private and institutional investors;
• Mergers and Acquisitions Services;
• Financial analytics and research;
• Market makers for individual species valuable papers .

Mergers and acquisitions

Mergers and acquisitions for an investment bank operating in a country with a developed financial market quite often become the main area of ​​income generation. Many Russian enterprises and financial groups have not yet reached the level of development when there is a need for the services of an investment bank to conduct mergers and acquisitions. In Russian conditions, mergers and acquisitions often mean transactions with large blocks of shares. However, the activity of buying and selling individual businesses is not the same as mergers and acquisitions. The activities of an investment bank during mergers and acquisitions can be divided into the following components:

• consulting activities to determine the optimal option for business restructuring;
• attracting financial resources for mergers and acquisitions;
• accumulation of large blocks of shares on the market at the request of a client (purchase of large blocks), sale of large blocks of shares;
• restructuring of a separate company and sale of its parts;
• development and implementation of effective protection of the client from takeover.

Securities trading

This type of activity is defined as external due to the ability to directly sell brokerage services, that is, services for the purchase and sale of securities.

At the same time, securities trading activities are also carried out as a tool for supporting investment banking activities (sales of placed securities) and asset management activities (purchases and sales of securities in the process of restructuring the securities portfolio). Moreover, in developed financial markets, securities trading is understood not simply as the process of concluding transactions for the purchase/sale of securities, but as the implementation of complex trading and arbitrage strategies, consisting of both many simple purchase/sale transactions and more complex transactions.

In Russia today, securities trading almost always means unrelated purchase/sale transactions, and only occasionally do large institutions use more complex transactions.

The organization of securities trading within an investment bank or a large investment company is a separate area of ​​business and science, which has its own complex laws and technologies. This is the type of activity that is mastered by market participants first of all. In most cases, large Russian market participants have fairly high-tech divisions engaged in trading operations with securities.

Financial analytics and research

One of the activities of investment banks is the provision of financial analytics on the securities that the bank trades. This activity in itself, as a rule, does not bring profit. On the contrary, it has become one of the most expensive in investment banks. That's why this type activities can be classified as intermediate between external and internal activities of an investment bank. For execution external views The investment bank also develops its activities internal views activities that ensure normal operating conditions for those divisions that carry out external activities and generate profit. The largest items of income for an investment bank include income from the provision of services for attracting financing. This creates a conflict of interest between the analytical and external banking divisions. In the United States, independent analytical agencies have received significant support. Thanks to new requirements, according to which investment banks, in addition to their own analytical reports, must provide their clients with independent analytics.

Notes

Links

• Investment Banker Job Description

Today we will talk about what an investment bank is. This term usually means a specialized financial structure that specializes in raising capital for international corporations, as well as governments of various states.

Besides, similar organizations provide their clients with various types of services, including brokerage, consulting, and also create analytical reports.

In modern economic literature, the term “investment bank” refers to a specialized structure that organizes the issue and placement of shares/bonds. In addition, this organization advises clients on various issues that relate to financial markets.

An investment bank, in essence, is a financial intermediary that provides its clients with a huge variety of services. Organizations of this type can act as an underwriter when placing shares/bonds of a company on the stock exchange.

It is important to note the fact that an investment bank is not a traditional lending institution. This is due to the fact that it does not provide the services typical of most traditional lending institutions, which include depository and lending operations.

In modern domestic legislation there are no rules relating to the activities of investment banks. Thanks to this feature, almost any domestic credit institution is able, if necessary, to play the role of an investment bank.

Investment bank. Peculiarities

The key difference between an investment bank and a traditional lending institution is that it uses different financial instruments to redistribute the money supply. A traditional bank generates revenue from direct lending as well as from cash and settlement services to customers. Investment banks derive their primary income from bond/bond transactions and brokerage/dealer operations. Consulting services can serve as an additional source of income for investment banks.

An investment bank has the following characteristic features:

1. It is a universal large commercial structure that deals with a full range of transactions with shares/bonds on the market.
2. The main activity of such structures is to raise capital for clients using shares/bonds.
3. Similar structures operate in wholesale financial markets.
4. The basis of the portfolio of such structures are non-government shares/bonds.
5. Structures of this type specialize in long-term and medium-term capital investments.

Main types of investment banks

All investment banks existing on the international market can be divided into two main types:

1. Structures of the first type specialize in the placement of shares/bonds, as well as in their trading.
2. Structures of the second type specialize in long-term lending.

The first type of structures described usually plays the role of organizers of the issue of shares/bonds. When performing these operations, they also act as guarantors who, regardless of the result of the placement of bonds/shares, pay a pre-agreed amount for them.

The clients of such structures are the governments of various countries, as well as large companies that, in need of investment capital, resort to issuing bonds/shares. In this case, investment banks independently identify the optimal volume of securities issue, as well as the timing of their issue and terms of placement. In addition, they can ensure the circulation of issued shares/bonds on the secondary market.

Also, investment banks of the second type can act as intermediaries in the placement of Euroshares and Eurobonds. They can advise their clients and help them choose the best investment strategy.

The second type of organization described differs from the first not only in the functions performed, but also in the organizational structure. These organizations can be public or private, and also have a mixed structure. The key task of organizations of the second type is long-term and medium-term lending in various areas National economy. They can also lend to targeted projects that involve the introduction of innovative technologies.

Services

Investment banks provide their clients with a range of specialized services, including:

1. Carrying out a feasibility study investment projects. This service includes assessing the effectiveness of projects, as well as creating investment programs and preparing all necessary project documents.
2. Creation of emission portfolios. This service involves the creation of specialized programs that allow the company to attract the required amount of capital. Investment bank employees assess the market situation in order to develop an optimal schedule for issuing shares/bonds.
3. Underwriting. This service involves organizing the issue of shares/bonds of an enterprise, as well as a guaranteed repurchase of issued securities, regardless of the results of the placement.
4. Creating stock/bond portfolios for large investors. This service involves analyzing the current state of the financial market and forming an optimal investment portfolio based on the data obtained.
5. Brokerage and dealer services that involve performing various stock market transactions on behalf of clients.

There are many credit institutions on the domestic market that perform the functions of investment banks, including special attention organizations such as Sberbank, Alfa Bank, VTB Group, etc. deserve it.

There are few places in Russia where a specialist working for the first year can count on compensation of up to $7,000-8,000 per month. This is possible in investment banks.

The main purpose of investment banks is to work with clients who want to either buy a business, sell it, or list the company on the stock exchange. The bank helps them carry out the transaction within the framework of the law in the most favorable way. In 2008, the financial crisis led to the layoffs of thousands of investment bankers and curbed the appetites of those who retained their jobs. It seemed that the burst bubble would no longer inflate. But a year and a half after the collapse of Lehman Brothers and the crisis of other giants, the market began to gradually recover. The number of mergers and acquisitions has increased, debtors are preparing for an IPO in order to cover loans with funds from the sale of shares (the latest example is the IPO of Rusal). According to a report from the Russian office of J.P. Morgan for November 2009, the volume of orders began to grow, and work for bankers was increasing. Leading headhunting agencies confirm that the demand for financiers has increased.

Back in 1989, former bond trader Michael Lewis wrote the best-selling book Liar's Poker, a naturalistic portrayal of the financier's kitchen. How much has their lifestyle changed in 20 years? Forbes decided to find out and at the same time remind those who want to follow Lewis’s heroes what they will have to sacrifice for the sake of a high salary. The investment bankers themselves, current and former, told us their stories.

Work at night, show dedication

First, a test - will they take you to an investment bank or not?

If you graduated or almost graduated from a decent economics university - State University-Higher School of Economics, REA named after. Plekhanov, NES, Financial Academy, Faculty of Economics of Moscow State University - there is a chance to get an interview. They will require answers to questions about corporate finance: “what is free cash flow and how is it calculated?”, “what is the weighted average cost of capital?”, “how to build a financial model in Excel, step by step?”, “what methods of company valuation do you know ? etc.

You can find out the answers by reading a couple of textbooks. But besides this, you need to demonstrate fluency English language and convince the employer of your endurance. And most importantly, demonstrate the desire to complete a huge number of tasks under constant pressure, in conditions of lack of time.

The first thing a qualified newbie faces is the mindset that financiers have to work hard. Night vigils are encouraged. An employee will never leave before nine in the evening - it’s not allowed. The rules of good manners dictate staying up late: by leaving early, you offend colleagues who have “three cartloads of work” and who today may spend the whole night in the office. In extreme cases, you will have to put on a smart face and read the Internet until 10-11 pm.

Non-resistance and acceptance of all customs inherent in investment banking is called commitment. If the newcomer has not demonstrated a commitment, further participation in the “liar's poker” is in question. Here is an example from life.

Analyst Dmitry entered Renaissance Capital, waited with trepidation for the first Monday and went to work. I completed my duties by 21.00 and went home. The following days - the same schedule. On Friday, a manager approached Dmitry and said: “You don’t spend enough time in the office!”

“Imagine, I was not reproached for not performing my duties well enough or for not finishing my work and going home,” Dmitry is indignant. - They said there wasn’t enough time in the office! I do not undertake to comment on this important, monumental, epic statement. Only silence and reflection are appropriate here.”

However, among the new arrivals there are those who wholeheartedly accept night work and coming to work at 7 am - in a word, it shows “commitment”. Dmitry's colleague, analyst Denis, likes to leave later than everyone else, around 4-5 in the morning. And so that everyone can see what time he was at work, before leaving, he sends some joke to his colleagues by e-mail. It seemed like he made people happy, but on the other hand he reminded them: “Look, at 5 am I’m still in the office!”

“My friend works in London, and they say “He"s a good guy! I saw him on weekends” (“He’s great! I saw him at work on the weekend”),” says Dmitry. “The strange logic of this statement is as follows: "If a person is in the office on the weekend, then he has a lot of work, and he does not have time to do it on weekdays. If you were not in the office on the weekend, then you will not be able to give the impression of a busy and cool guy."

Forget about the holidays, get ready to work on vacation

A newcomer to an investment bank is doomed to work like hell. But in the first months, many people have a glimmer of hope that they will be able to relax during the holidays, see family and friends, and go on vacation. However, these dreams quickly disappear.

Morgan Stanley analyst Maria was going to her native Kaluga for the holidays, for the birthday of her sister, whom she had not seen for a long time. Sitting on the train, Maria received a call from her boss - “to the office urgently!” What to do? Maria kissed her relatives, presented them with a gift and, after sitting there for the sake of decency for half an hour, ran off to catch the return train.

Here's a more recent story. On New Year's holidays, when the entire team had gone to the resorts, Renaissance Capital employee Pavel was sitting at his workplace and preparing documents for the transaction. On January 3, he had to go to work by noon, and he left home the next day at seven in the morning - with instructions to be in the office in four hours. Naturally, it was not possible to sleep; the state approached stupor, but Pavel realized that he needed to work. And then - another day of work and leaving at 4 am with instructions to come by 10.00...

Loss of strength, depression, terrible lack of sleep - Pavel describes his feelings. With an incredible effort of will, he managed to concentrate on work that required increased attention - proofreading a 150-page memorandum in English. “When this madness lasts for the third day, a feeling of doom sets in, it seems that it will never end,” Pavel sighs. “I don’t have my own strength to get out of the situation, time becomes rubber.” He feels as disgusting as Maria from Kaluga, but he really hopes for a bonus at the end of the year.

“It all depends on the bank!” - Irina, who has been working for more than two years in the corporate finance department of one of the largest European banks (and before that in a smaller investment bank), assures me. We are sitting in an Italian cafe, since investment bankers can only make time for a meeting during lunch or dinner. Irina has shiny, almost sparkling hair, a strong-willed face and reddened eyes. In front of her are three phones - a work iPhone, a simple home mobile phone and a Blackberry (for viewing mail). She apologizes and looks into the latter a couple of times during lunch. In Western banks, Irina is convinced, management listens to subordinates, and most importantly, “everything is not so bloodthirsty.” In her words, this means that on average analysts work from 9-10 am to 23-24.

Some investment bankers learn over time to take spontaneous calls to work with humor. Alexander Shulzhenko from Deutsche Bank's corporate finance department eagerly tells how he had to build a financial model on the street at night under the supervision of armed guards. Alexander spent his holidays in Egypt, surfing. Late in the evening, an assignment arrived in the mail that required constant access to the Internet. However, WiFi only worked outside. That same night, a local holiday was celebrated in the village. The police patrol, which is sensitive to tourists, decided to stand next to Alexander until the morning so that onlookers would not pester him with an offer to help.

Come to terms with useless labor

The problems of novice investment bankers are not limited to all of the above. Often, bosses (“associates”) are involved in instilling fighting spirit in young people and assign tasks at night that do not require urgent completion.

Analyst Nikita has been idle since 15.00. He completed everything he needed and was preparing to go home after surfing the Internet until ten o’clock in the evening. Closer to 22.00 the phone rang: the boss demanded to make a presentation. Nikita understood that the task had been ripe for a long time, it could have been given during the day. But all the “associates” once themselves knew the taste of night vigils, and Nikita had a suspicion that the situation was similar to military service- bosses want their wards to go through the same ups and downs as they did.

Nikitin's suspicions were confirmed. He was given the task of making a presentation by the morning. He spent six hours on the task and by four in the morning he placed the document on his boss’s desk. He remembered about the presentation only in the evening of the next day.

There are also examples of more severe “education of feelings.” At 4 a.m., global bank analyst Mikhail decided it was time to go home and called a taxi. Approaching his Northern Butovo, Mikhail received a call. With sincere indignation, the “associate” asks: “Where are you? Go to the office immediately, we need to finish the work.” “But it’s a matter of patience, if I arrive at 10 am, I can quickly finish everything,” Mikhail stammered. Without any objection to this phrase, the “associate” ordered to rush to the office. Mikhail had to obey - despite the fact that the work was so not urgent that it could not even be completed the next day, but even later. The only thing that warmed me was the thought of future bonuses. However, a crisis occurred and Mikhail was laid off.

As investment bankers say, the industry knows different ways to train the endurance of subordinates. For example, an analyst may be asked to come at 6-7 am, and the “associate” himself shows up at the office at 9-10 am. Result: the analyst takes a nap on chairs and armchairs in the office.

Or not on chairs. In investment banking there is such a thing as “unison”. In slang - sleeping on the toilet. According to an informal survey of bank analysts (Deutsche Bank, Renaissance Capital, UBS, ING Bank), Renaissance Capital's toilet stalls were considered the most comfortable in the era when the office was located on Voznesensky Lane. The plumbing was installed in such a way that one could take a nap comfortably. At the same time, a huge advantage was the soundproofing of the cabin, which contributed to sound sleep.

How do workers feel when they endure such trials? They grit their teeth, but hope that the annual bonus will pay for everything. But for this you need to serve until the end of the year. Everyone who is fired before December 31st is paid off in the same Renaissance Capital with three salaries, while in Western banks they are traditionally compensated with six-month salaries.

“Our work is closest to the work of politicians,” grins Dmitry, an employee of the customer service department at a foreign investment bank. He admits that it is not so much the 12-13 hours of work that tires him, but the psychological stress. Every day, every hour you need to pretend to be something, to comply with the rules. “You need to behave as your superiors expect from you - to show great initiative, even if it is not needed,” Dmitry laments. - I perceive it as show business - you wave your hand all the time: “I am”, “I am here”, “I am participating in this.” But usually there is no creative work behind this.”

Why do investment bankers put up with all this?

Why do people agree to this lifestyle? What reconciles them with leaving their own wedding for work, with uncertainty about plans even for the weekend?

First of all, money. The formal salary of an analyst in the first year of work in investment banks is 70,000-120,000 rubles per month, but if the year was successful, at the end they can pay a bonus in the amount of the annual salary (more in pre-crisis years). “The dream of every investment banker is to earn an apartment with a car in five years and leave,” says an ING employee.

“It is important that slavery is not forever, but for a very foreseeable period, for example, three years,” reasoned Irina from a large European bank. For 25-year-olds, this time period does not look fatal. It’s easy to accumulate money; there’s practically no time to spend it, except on vacation.

Secondly, investment bankers are valued in industrial companies. “Working in corporate finance gives me the kind of experience that I would have had to gain for ten years elsewhere,” emphasizes Irina. It is believed that specialists have gone through fire, water and copper pipes. It's not just about endurance. Frequent business trips, communication with clients, and getting to know different businesses broaden your horizons.

“I am motivated by working in an international team, participating in transactions that are written about on the front pages of newspapers,” says Alexander Shulzhenko, who in three years rose to the rank of “associate.” - Our work combines knowledge of accounting, jurisprudence, and strategic management. Regular trainings contribute to development. This summer, all analysts who were promoted to associates completed the summer executive MBA program at New York's Columbia Business School."

In addition, employees of investment banks have access to all countries, are paid for a taxi and telephone, are provided with medical services, and a large social package. It's hard to lose all this. Therefore, if investment bankers fall into downshifting, they usually return to their own or a related industry.

However, there are exceptions. In the summer of 2009, I met a classmate with whom I studied at the Faculty of Mechanics and Mathematics at Moscow State University. Maria worked for three years at J.P. Morgan and other banks. She was about to be promoted, but she quit of her own free will. A day after the last day of work, he and his friend flew to Spain, shaving their heads as a sign of gaining freedom. Then there was a tour of Europe, a march across the USA, where Maria visited all her friends. Now, seven months after her dismissal, she is studying at a photography school at the cinematography department of VGIK.

“IB is a lifestyle,” explains Maria. - You work with clients from different industries, communicate with professionals in your field, from whom you can learn a lot. But now I don’t flinch at every phone call with the thought that they’re calling me back to the office.” Maria wants to take up photography professionally. As a last resort, it allows for a return to the research (market research) or trading (exchange trading) departments of investment banks.

I asked: if she doesn’t manage to retrain as a photographer or go to “quiet” departments, will she return to corporate finance? Maria shook her head vigorously: “No. Definitely not."

Posted on the website 03/18/2009

Of course, capital markets are frozen. There is no need to expect any placements, much less public ones. But now the reverse process is gaining growth - repurchasing shares and bonds from the market, working with problem debts, restructuring problem assets and other special financial solutions.

Commercial and investment banks

The idea of ​​dividing banking into commercial and investment banking arose in the mid-1930s and became a natural consequence of the severe financial crisis known as the Great Depression. This was legislatively enshrined in the Glass-Steagall Act, the main principle of which was the separation of risks accumulated by investment banks and the risks of commercial banks that work with the public, which means that their stability is in many ways the cornerstone of the stability of the financial system and the economy as a whole.

The Glass-Steagall Act was passed in 1933 to separate the activities of investment and commercial banks. The act was a response to speculative operations by commercial banks in the securities market, which was one of the factors behind the collapse of the American stock exchanges in 1929. Banks used deposits to play on the stock exchange and resell shares to their clients. The consequence of the law was the emergence of specialization of banks. In turn, the law caused enormous discontent in the professional community, and banks even campaigned in support of the repeal of the law, arguing that diversification reduces risk. In 1999, the law was finally repealed and replaced by the Gramm-Leach-Bliley Act, which permitted the consolidation of commercial and investment banks, although a number of restrictions aimed at preventing conflicts of interest remained. One of the first to take advantage of this law was Citibank, which merged with the Travelers Group insurance company to form a banking group providing a full range of financial services, including corporate banking and underwriting services under the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation brands.

The debate about which model is more effective - the American concept with the separation of banks or the European one with its system of universal banks - continued for quite some time. Ironically, these disputes will be resolved by a new global crisis, which in its scale and possible scenarios is already comparable to the Great Depression and which completes the previous long cycle of development of the economic system.

Wall Street Crash

What happened in the USA? But something happened that no one could have imagined a year ago: the entire financial industry, the pride of Wall Street, disappeared. There are no more “Big Five on Wall Street,” as the largest global investment banks were called. This "five" included investment banks Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

The era of investment banking began in the United States 75 years ago with the above-mentioned legislative separation. Of course, historically in Great Britain, France and other European countries there was a conditional division. There were so-called merchant banks in the UK (merchant banks) and in France (banques d’affaires), but the investment industry in its modern sense began to emerge in the USA. For many years, the main source of income for investment banks was brokerage: until May 1975, there was a fixed commission that banks charged their clients. This fixed fee allowed investment banks to successfully weather the 1973 oil shock crisis. The abolition of fixed brokerage commissions led to a decrease in the profitability of brokerage activities of investment banks. In turn, compensation was required from new sources of income, often more risky. Investment banks began to manage equity and debt capital. Investment banks had 30 years of prosperity ahead. They began to grow quickly, recruit thousands of people, expand throughout the world, opening offices from Moscow to Mumbai. Wall Street giants also settled in the City of London by purchasing smaller merchant banks such as Warburg, Schroders, etc.

The capital markets business—sales and trading—has always been a key component of the investment bank model. Unlike the consulting block, provision efficient work sales and trading cost banks much more. Special IT technologies, a huge number of people and many other things are required, the installation and maintenance of which are quite expensive. By some estimates, the cost of cooling the investment bank's trading floors, which house scores of computers, on a typical New York summer day would be enough to outfit a small village somewhere in Africa. At the same time, M&A bankers need much less infrastructure. Several beautiful meeting rooms for clients, Power Point, Excel, access to several databases and BlackBerry are already enough for work.

Thus, investment banks had already made significant investments in infrastructure, and cash was needed to maintain it, and fees were steadily declining. Something had to be done to make better use of the existing infrastructure.

Then new departments appeared in investment banks that dealt with trading using their own funds. Investment bank Salomon Brothers was the first to create a department for trading securities at its own expense (proprietary trading). Now he not only bought and sold clients' securities, but also began to place his own bets on market movements. The pursuit of excess profits forced us to take more and more risks. Of course, between the various divisions of investment banks, so-called “ chinese walls", designed to ensure that confidential information about the state of companies, upcoming transactions and releases would not be distributed to those departments involved in trading and analytics. Moreover, these restrictions in global investment banks are usually very strict. For example, if an investment banker from the corporate finance department (IBD) wants to talk to an analyst from the equity research department, then this conversation can only take place in the presence of a person from compliance, who must monitor the conversation and make sure that no information is leaked . At the same time, analysts from equity research can be involved in IBD projects, but in this case they lose the opportunity to cover this company for some time. At the same time, there was an active development of various financial products, more and more complex financial instruments appeared, in particular, credit and financial derivatives and financial engineering products, which were developed and issued by investment banks. At the same time, banks created departments for trading these instruments, where their own and borrowed funds were invested.

Financial innovation has made banks extremely dependent on the movements of stock markets. The Fed's low interest rate policy following the 2001 crisis created a liquidity bubble in the capital markets and laid the foundation for the US subprime mortgage crisis that marked the beginning of the global financial crisis.

September 2008 was probably the most dramatic month in the history of modern finance. Banks that survived the crises of the nineteenth and twentieth centuries collapsed overnight. In this highly turbulent autumn, the Moscow office of Credit Suisse even released an analytical report on the state of the Russian stock market with the title “The autumn we shall never forget.”

So, only in September 2008, Silver State Bank (1996 1, bankrupt), Lehman Brothers (1850, bankrupt; business in the USA was purchased by Barclays, in Asia and Europe - Nomura), Merrill Lynch (1914). , purchased by Bank of America), AIG (1919, nationalized), Ameribank (1906, bankrupt), HBOS (1695 and 1853 2, purchased by Lloyds TSB), Washington Mutual (1889, purchased by J.P. Morgan Chase), Bradford & Bingley (1851, nationalized).

October was even more terrible in terms of falling prices for stock assets: the fall reached 50-90% of historical highs. The series of bank failures continued. In October, Wells Fargo (1854) bought the Wachovia Bank (1908). Morgan Stanley was forced to sell a 21% stake to the Japanese financial group Mitsubishi UFJ Financial Group (MUFG).

At the same time, on September 15, when Lehman Brothers was declared bankrupt, there was a sense of panic in the market. Here's how some prominent representatives of the investment banking community reacted to this event.

“On Monday, September 15, when Lehman Brothers fell, it became clear: a disaster! Before this, there was no such feeling,” recalls Ruben Vardanyan (Troika Dialog). “It was a huge blow.”

Yuri Solovyov (VTB Capital): “This was accompanied by a colossal increase in spreads. For Russian issuers they expanded 2-3 times. Everyone realized that no one is eternal and even such a big player can give up. After this blow, many were never able to recover.”

“The world has changed in a day. There was an unpleasant feeling - the process of the collapse of the financial system is beyond control,” comments Alexander Pertsovsky (Renaissance Capital) 3 .

It must be said that in the United States, the difference between commercial banks and investment banks from a regulatory point of view is that the latter are controlled only by the US Securities and Exchange Commission (SEC). By October 2008, only two of the big five banks had survived, and the surviving banks were also on the brink of failure in the long term. Therefore, the management of these banks was faced with a choice: selling shares to strategic investors or changing their legal status. In conditions of liquidity shortage and, in fact, the absence of their own permanent sources of funding, investment banks were faced with the question of financing their own activities. In addition, Morgan Stanley and Goldman Sachs remained outside the Fed's financial support for the banking sector, since they were investment banks, which means the Fed could not support them with its injections.

The US Federal Reserve has allowed Morgan Stanley and Goldman Sachs to change their legal status from independent investment banks to bank holding companies.

The new status of Morgan Stanley and Goldman Sachs is a double-edged sword: for help from the regulator, organizations will have to pay a share of their freedom. Investment banks now have access to the Fed's emergency loans on an ongoing basis. As investment banks, Morgan Stanley and Goldman Sachs could only count on temporary access to the emergency lending program.

However, in addition to the Securities Exchange Commission, banks are now regulated by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

In Europe, although the situation in the industry was no better, bankruptcies of large banks were avoided. Many banks that are active players in the market in question have attracted significant funding from the state or their current shareholders.

In particular, the Swiss investment banks UBS and Credit Suisse used different sources of assistance: UBS attracted financial assistance from the government of the country, selling convertible bonds worth $5.2 billion to the state (after exchanging bonds for shares, the Swiss government will own about 10% of the bank), and Credit Suisse managed to raise about $9 billion from private investors, among of which, for example, the Qatari state fund Qatar Investment Authority. In addition, the Swiss National Bank created a special fund to which UBS, which suffered more than other European banks from the credit crisis, transferred about $60 billion of problem assets. Banks are faced with the difficult question of choosing a future development strategy, with the emphasis apparently being on reducing the scale of the investment banking business and focusing on asset management. Although it is obvious that these issues have not yet been completely resolved.

From investment banks to universal ones

All of the above can be summed up in the words of the Managing Director of the International Monetary Fund, Dominique Strauss-Kahn, who stated: “The American model of an independent investment bank has failed. From now on, the investment component will exist in universal banks. US investment banks, including the most famous ones, actively participated in speculative transactions with dubious assets and, as a result, suffered colossal, and for many, unsustainable losses” 4 .

Companies in both the financial and real sectors suffered from the crisis, but the investment banking business suffered almost the most. There are reasons for this: key business model assumptions based on the assumption that there will always be access to cheap liquidity have proven to be the most fragile in the face of unexpected and massive liquidity reductions. When the market realized that this business model was not working in an environment of sharply reduced and greatly increased access to liquidity, the value of equity and debt of investment banks fell sharply. Some were unable to survive in the new conditions or were forced to look for strategic partners. Among investment banks, only those who have their own financial capital and the ability to use it will survive.

In conditions of, let's say, sufficient liquidity, the main method of financing an investment bank is repo. Therefore, when there is a question of trust in the market, or one of the serious players begins to have problems, the entire system can feel the consequences of this. In particular, such a situation arose with the KIT Finance bank, which ceased to fulfill obligations under repo transactions. Almost simultaneously, the credit lines of foreigners and then Russian market participants began to be cut off - everyone stopped giving loans and extending repo lines.

Some smaller investment banks have weathered the credit crunch much better than larger players thanks to strong capital bases and little exposure to the subprime mortgage market.

Within universal banks, the appetites of the investment bloc will depend heavily on how the group weathered the credit crisis.

Many large universal banks, such as Citigroup, for example, have very complex organizations and seem a little unwieldy, but many, such as HSBC and J.P. Morgan benefit from a strong deposit base.

As a result of the crisis, capital adequacy standards will be raised and general attention to what an investment bank or the investment unit of a banking group does will increase. In this case, there will be restrictions both on the part of the regulator and on the part of shareholders.

Banks that have suffered serious losses in investment areas of activity will try to reduce the share of high-risk and highly profitable business. Credit Agricole has almost exited investment banking, and UBS, based on market information, is splitting its asset management business from the investment bank, which may be spun off and then sold.

At the same time, a number of banks, including J.P. Morgan, Barclays, BNP Paribas and Deutsche Bank are planning to take advantage of the current situation. In particular, Barclays acquired the American business of Lehman Brothers, and J.P. Morgan, in fact, consolidated the US investment business.

Today, investment banks are reshaping their businesses in different ways. The main thing is that they understood how important it is to have their own deposits, they realized that relying only on the investment banking market is very dangerous. Both Morgan Stanley and Goldman Sachs have applied for banking licenses. First of all, because deposits represent more stable funding, and therefore the risks are much lower.

The bank receives another advantage if it is universal and engages in corporate lending. In this case, a more stable relationship develops between the company and the bank, and the bank can offer a full range of services that the company may require at any stage of its life cycle. This creates a much stronger bond between the company and the bank.

Nevertheless, I would still like to emphasize that all financial institutions today have problems, and the incorporation of investment banking structures into a universal bank is not a panacea. The crisis showed that problems arose not only among investment banks in their pure form, but also among commercial banks with serious retail business, such as RBS, HSBC, etc. Almost all banks faced the problem of insolvency on the part of corporate borrowers, whose business suffered greatly from the economic downturn. There is not a single financial institution that does not face the problem of recapitalization. The banking systems of entire countries were on the verge of collapse, in particular, serious problems arose in Iceland, the Baltic states, Kazakhstan and a number of other countries.

For example, in Kazakhstan, where banks actively attracted financing from foreign banks, in the context of the crisis in global credit markets, available liquid resources sharply decreased, which led to an increase in the cost of borrowed funds. The reduction in lending volumes and higher rates on bank loans led to a decrease in the value of assets, especially real estate (residential and commercial properties). Loan quality continued to deteriorate due to significant volumes of construction lending as the value of collateral fell. Against this background, there was a sharp drop in bank stock prices (by 90% compared to peak figures) and an increase in spreads on bank CDS to a record (default) level (3000 points). The government had to take urgent action to support the banking system. A comprehensive program to support the banking sector was adopted in the amount of $11 billion, of which $5 billion is provided for supporting capital of banks. The 4 largest banks (BTA, Kazkommertsbank, Halyk-Bank and Alliance-Bank) were recapitalized by purchasing 25% of the changed authorized capital. The rest of the money is intended to fund the Troubled Asset Fund, which will purchase non-performing assets from banks at fair market value.

Thus, all financial institutions will emerge from the current crisis with different losses, so there is no need to expect rapid growth, a rapid surge in trading activity and a restoration of risky operations of banks. The model of an investment bank included in a universal bank will be more conservative.

Financialization as the main cause of the financial crisis

It is clear that this crisis is in many ways unique compared to previous financial turmoil. There is something special about it, if only because this crisis can be considered the first crisis of the global economy and the global financial system. At the same time, this crisis is also distinguished by the huge complex of anti-crisis measures that are being taken by the governments of developed and developing countries to overcome the consequences of negative trends in the financial and real sector. Today we are talking about trillions of dollars directly aimed at maintaining the economic system and billions of dollars in indirect stimulation of the economy.

Let's consider a package of anti-crisis measures for a number of major economies and Russia.

USA. Deposit guarantees increased from $100,000 to $250,000. An economic stabilization law was passed, which established a $700 billion distressed asset rescue program. The Treasury Department received broad authority to purchase a wide range of instruments, including investments in specific mortgage obligations, mortgage and related securities, asset-backed securities and variable rate debt instruments (ARS). The Treasury Department announced a capital program under its distressed asset buyback plan, under which the first $250 billion will be used to inject capital into U.S. banks, savings associations and certain banking, savings and loan institutions engaged in financial-only activities. The Treasury Department has identified 9 organizations to participate in the program, which will receive $125 billion of this amount: Wells Fargo, Bank of America, J.P. MorganChase, Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of NY Mellon and State Street.

Great Britain. Guarantees on deposits have been increased from £35 thousand to 50 thousand. The government has injected capital into British banks in the amount of £37 billion. Royal Bank of Scotland will receive £20 billion ($34 billion) - the state will purchase preferred shares worth £5 billion and will buy back £15 billion of ordinary shares. A further £17 billion ($30 billion) was provided to HBOS and Lloyds TSB after their merger. £250bn proposed in loan guarantees. £200 billion is being provided as part of the Bank of England's liquidity support programme.

Germany. A Financial Market Stabilization Fund has been created in the amount of up to €80 billion ($109 billion) to buy back shares of banks. The state guaranteed interbank loans in the amount of €400 billion ($549 billion). Unlimited guarantees have been introduced for all household deposits in German banks (previously guarantees were limited to €20 thousand)

France. A fund of €40 billion ($55 billion) has been created to buy back shares of French banks. Guarantees were provided for interbank loans in the amount of €320 billion ($437 billion) for the period until the end of 2009

Russia. The government has allocated 950 billion rubles. ($36.3 billion) to provide 10-year subordinated loans financial institutions. The Central Bank of the Russian Federation received the right to issue short-term unsecured loans to Russian banks. During the first auction (October 23), the Central Bank of the Russian Federation placed 400 million rubles. ($15 billion). The list of collateral accepted by the Central Bank of the Russian Federation as collateral for refinancing has been expanded. Vnesheconombank has been allocated $50 billion to pay off the debt of banks and companies on foreign loans with upcoming repayment dates. The amount of insured deposits has been increased to 700 thousand rubles. from 200 thousand rubles. The Deposit Insurance Agency has been allocated 200 billion rubles. ($7.7 billion) to recapitalize the banking sector, and were also granted exceptional powers to prevent bankruptcies, including establishing control over banks. The Central Bank of the Russian Federation received the right to compensate banks for losses incurred as a result of transactions with counterparty banks whose licenses and the right to intervene in Russian capital markets were revoked to maintain stock prices.

The crisis is far from over, and developed and developing countries have already collectively spent trillions of dollars to support the economy. Not to mention the enormous damage that stock markets suffered, losing about $25 trillion in capitalization in 2008, which is about 40% of the market value. Markets fall in developed countries amounted to about 30-35%, in developing countries - up to 60-70%.

The current financial crisis has two main causes:

Monetary policy (cheap money policy);

Weak regulatory systems.

The policy of cheap money created the illusion of permanent availability of liquidity, which distorted the motivation of economic entities, and regulatory systems were unable to counteract such incorrect motivation. And here is the result: a completely incorrect assessment of risks, the overestimation of which, expressed in an almost universal, sharp and deep drop in asset prices, is what we are now seeing.

The financial sector is the first recipient of any crisis in the economy. At the same time, investment banks, in a certain sense, being at the forefront of the economy, react faster than others to the opportunity to make money. But the higher you fly, the more painful it is to fall. The use of their own balance sheet, active debt financing, and the issuance of various derivative instruments put banks in a difficult position in the context of deteriorating financial market conditions.

The situation is further aggravated by the fact that many large financial institutions are public companies. In the context of our problems, most Western investment banks are public. Any public company is under pressure from its shareholders, customers and investors to see its earnings grow. There is another refraction of the agency problem, when, on the one hand, it is necessary to properly serve clients in a way that brings them the greatest benefit and meets their interests, and on the other hand, to demonstrate constant growth in income for shareholders and investors every quarter. But there is a more important feature of investment banks, which calls into question the possibility of publicity of this business. Initially, investment banks operated as partnerships. The management of the Russian Troika Dialog, for example, adheres to the position that not all types of business should be public, and have formed a private business model in their company, which is jointly owned by management. And yet, what is investment banking business? What does it produce? If you read the website of any investment bank, or any of the brochures handed out at student presentations as part of the annual recruiting process, there is a clear answer to this question: an investment bank is about people, people who generate new ideas for business. In a growing market, a real “running around” begins between banks in pursuit of large bonuses. And in a crisis situation, large-scale layoffs begin. And then what remains of the business? It is likely that the public investment bank model is not justified due to its inherent shortcomings.

In this vein, I would like to mention the phenomenon of financialization. Its emergence is associated with the rapid development of financial markets, which determined the flourishing of financial institutions and the increase in their role and influence in the economy.

American economist Gerald Epstein, who published a book entitled “Financialization and the World Economy” in 2006, defines this process as “the rise of the importance of “shareholder value” as the main method of corporate governance, the growing dominance of the financial system built on the capital market over a financial system built on the banks’ own capital.” And American economist Greta Krippner described financialization as “a mode of accumulation in which profits are increasingly produced through financial channels rather than through trade or the production of goods.”

Quantitatively, the degree of financialization of the economy can be measured by the ratio of the main indicators of financial market development and GDP. For example, the US stock market in 1970 was only $136 billion (13.1% of GDP), by 1990 it grew to $1.67 trillion (28.8%), and at its peak in October 2007, the capitalization of the American economy was already $18.5 trillion (135% of GDP). But the derivatives market grew the fastest. In 2007, trading volume in all derivatives reached $1.2 quadrillion, which was 87 times the size of the US economy. Moreover, the largest share among derivatives after the abolition of the fixed exchange rate system in the 70s is occupied by financial derivatives.

One of the main problems of financialization is the difficulty in assessing risks. At the same time, within the framework of this model, the so-called “neoliberal paradox” is inevitably formed for companies in the non-financial sector, which complicates the situation in the company in the context of crisis phenomena in the economy. Investor relations is an extremely important area of ​​activity for a public company, which does not ignore the secondary market for its shares. Therefore, companies constantly need to show profits in order to maintain their stock prices and ensure their growth. This is a necessary condition - both in favorable economic conditions and in the case of economic stagnation. In an environment of increasing competition or slowing growth, a non-financial sector company that wants to continue to please investors has several options to do so. Firstly, you can reduce costs, including through layoffs, secondly, use “creative” accounting, and thirdly, make a profit through financial transactions.

Thus, among the clients of the Madoff pyramid, in addition to large banks (HSBC, BNP Paribas, Santader, etc.) and funds (Fairfield Greenwich Group, Tremont Capital Management, etc.), there were many companies in the non-financial sector that hoped to increase profits not through its main activity - the production of goods and services or trade, but precisely through financial transactions.

Opportunities for business development in the medium term

What awaits the investment banking business? Of course, capital markets are frozen. There is no need to expect any placements, much less public ones. But now the reverse process is gaining growth - repurchasing shares and bonds from the market, working with problem debts, restructuring problem assets and other special financial solutions. For a company that knows for sure that it can survive the crisis and which, equally important, has free or potentially free cash resources, the most reasonable thing to do now is to buy its bonds at a significant discount from par, reaching up to 50%. . After EBITDA dropped significantly, for many companies the question became not only about paying off debt, but even about paying interest. Thus, many companies need to restructure debts or declare default and bankruptcy.

In the equity capital market, most transactions will involve creditors who will buy out shares in companies as part of debt restructuring.

The mergers and acquisitions market and its prospects are quite contradictory. On the one hand, in a situation where the light at the end of the tunnel is not yet visible, many companies that have available cash to finance purchases may want to hold on to inventories, on the other hand, we have witnessed a situation of unequal position of companies in which they find themselves during the crisis. Although, most likely, the state will play a special role in the M&A market.

It cannot be said that the current crisis will put an end to the investment banking business. Companies need financing, risk management tools, and investments. And capitalism itself cannot be imagined without the financial market systems that ensure its functioning, and in particular investment banking.