Investment Banking 101

Before the current financial crisis, 9 out of 10 people I talked to had no idea what an investment bank did.  "Can you give me stock picks?" they would ask, confusing investment bankers with stock brokers and wealth managers.  Now everyone thinks they understand what investment banks do, but are misguided and confused from watching to much CNBC and Fox News commentary on TV.  Why should bankers get paid so much money if they've lost billions of dollars?  I'll tell you why....the Investment Bankers didn't....

First off, investment banking in the true sense of the word refers to bankers who provide financial advisory services to corporate clients (Corporations, Private Equity, Venture-Backed companies) including M&A advisory, raising debt, raising equity and a variety of other services, but those are the core activities.  Investment bankers are not traders, they don't deal with mortgages, they're not trading stocks, they're not advising mom n' pops on their 401ks.  Investment bankers are advising multi-million and multi-billion dollar corporations who come to them for advice, financial analysis and help buying companies or selling their businesses.  There is no capital at risk in this relationship since the client (the company) is simply paying for advice, selling shares to institutional investors (hedge funds, mutual funds etc.) in an IPO or follow-on offering or raising debt, all of which the banker earns a fee for, while putting little-to-no firm capital at risk.  A single M&A transaction, in which the client is paying strictly for the advice, analysis and often high-profile relationships of senior bankers, can earn a firm tens of millions of dollars in fees.  If you brought in $10 million in business to your firm, how much would you like to get paid?... Probably a couple million bucks, right?  Me too. 

In a sense, an I-Banker is a lot like you're real estate broker, but for Corporations.  They advise you on buying or selling your house and handle all the pieces of the transaction that you may not understand and do the negotiating and heavy lifting for you.  You may not know the best place to get a loan or the right person to call, but your broker will.  Same thing goes for bankers - you want to reach the CFO or Head of Corporate Development at a Fortune 500 Company that you would like to sell your company to? Good luck, but the right senior banker will have access to those people and can get the company the meeting they need with the right C-Level people in the room.  Your real estate broker charges a 5% fee - or 2.5% split between the buyer's and seller's agent.  That investment banker who earned $3 million more than you did this year did the same thing - charged a small % fee for providing advisory services. 

More to come later on why junior level bankers are worth their weight in gold and deserve to get paid 6 figures directly out of undergrad....