Private company

investment bank

Financial service providing capital-raising and advisory functions

Last updated Oct 20, 2026.

Overview

See how the biggest companies compare on our leaderboards

Investment banking is an advisory-based financial service primarily for corporations, governments, and institutional investors. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also provide services to companies involved in mergers and acquisitions (M&A). These services may include market making, trading of derivatives and equity securities, FICC services (fixed income instruments, currencies, and commodities), or research (macroeconomic, credit, or equity research). Most investment banks maintain prime brokerage and asset management departments alongside their investment research businesses. The industry is broken into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses).²

The story

History

Early history

The Dutch East India Company was the first company to issue bonds and shares of stock to the general public. It was also the first publicly traded company, being the first company to be publicly listed. The activity of investment banking derived from merchant banks, who financed global trade ventures and were underwriting (putting their name under) large shipping projects to finance them. Most of this underwriting activity took place at Lloyd's Coffee House in London. This eventually became Lloyd's of London, the global insurer and place to pool insurance for unusual risks.

Further developments

Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.e., initial public offerings (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range including securities research, proprietary trading, and investment management. In the 21st century, the SEC filings of the major independent investment banks such as Goldman Sachs and Morgan Stanley reflect three product segments:

investment banking (mergers and acquisitions, advisory services, and securities underwriting),

asset management (sponsored investment funds), and

trading and principal investments (broker-dealer activities, including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).

In the United States, commercial banking and investment banking were separated by the Glass–Steagall Act, which was repealed in 1999. The repeal led to more "universal banks" offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions and hiring. Notable full-service investment banks with a significant investment banking division (IBD) include JPMorgan Chase, Bank of America, Citigroup, Deutsche Bank, UBS (Acquired Credit Suisse), and Barclays.

After the 2008 financial crisis and the subsequent passage of the Dodd-Frank Act of 2010, regulations have limited certain investment banking operations, notably with the Volcker Rule's restrictions on proprietary trading.

The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network.

Read the full text

2008 financial crisis

The 2008 financial crisis led to the collapse of several notable investment banks, such as the bankruptcy of Lehman Brothers (one of the largest investment banks in the world) and the hurried fire sale of Merrill Lynch and the much smaller Bear Stearns to much larger banks, which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was bailed out by government taxpayer funded loans through the Troubled Asset Relief Program (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief. Similar situations have occurred across the globe with countries rescuing their banking industry. Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets. Eventually, taxpayer assistance to banks reached nearly $13 trillion—most without much scrutiny— lending did not increase, and credit markets remained frozen.

The crisis led to questioning of the investment banking business model without the regulation imposed on it by Glass–Steagall. Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton administration and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit. Formerly, the guidelines said that in order to take a company public, it had to be in business for a minimum of five years and it had to show profitability for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the full impact of the change.

A number of former Goldman Sachs top executives, such as Henry Paulson and Ed Liddy, were in high-level positions in government and oversaw the controversial taxpayer-funded bank bailout. The TARP Oversight Report released by the Congressional Oversight Panel found that the bailout tended to encourage risky behavior and "corrupt[ed] the fundamental tenets of a market economy".

Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas banks, hedge funds, and pensions. The same year it received $10 billion in aid from the government, it also paid out multimillion-dollar bonuses; the total paid in bonuses was $4.82 billion. Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion in bonuses.

From Wikipedia’s article on Investment banking, shared under CC BY-SA 4.0.³

Controversies and legal

Criticisms

The investment banking industry, including boutique investment banks, have come under criticism for a variety of reasons, including perceived conflicts of interest, overly large pay packages, cartel-like or oligopolistic behavior, taking both sides in transactions, and more. Investment banking has also been criticized for its opacity. However, the lack of transparency inherent to the investment banking industry is largely due to the necessity to abide by the non-disclosure agreement (NDA) signed with the client. The accidental leak of confidential client data can cause a bank to incur significant monetary losses.

Conflicts of interest

Conflicts of interest may arise between different parts of a bank, creating the potential for market manipulation, according to critics. Authorities that regulate investment banking, such as the Financial Conduct Authority (FCA) in the United Kingdom and the SEC in the United States, require that banks impose a "Chinese wall" to prevent communication between investment banking on one side and equity research and trading on the other. However, critics say such a barrier does not always exist in practice. Independent advisory firms that exclusively provide corporate finance advice argue that their advice is not conflicted, unlike bulge bracket banks.

Conflicts of interest often arise in relation to investment banks' equity research units, which have long been part of the industry. A common practice is for equity analysts to initiate coverage of a company to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings for investment banking business. Alternatively, companies may threaten to divert investment banking business to competitors unless their stock was rated favorably. Laws were passed to criminalize such acts, and increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble after the dot-com bubble.

Philip Augar, author of The Greed Merchants, said in an interview that, "You cannot simultaneously serve the interest of issuer clients and investing clients. And it's not just underwriting and sales; investment banks run proprietary trading operations that are also making a profit out of these securities."

Many investment banks also own retail brokerages. During the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.

Since investment banks engage heavily in trading for their own account, there is always the temptation for them to engage in some form of front running—the illegal practice whereby a broker executes orders for their own account before filling orders previously submitted by their customers, thereby benefiting from any changes in prices induced by those orders.

Read the full text

Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained by New York Times' Wall Street Business columnist Joe Nocera alleged that IPOs managed by Goldman Sachs and other investment bankers involved asking for kickbacks from their institutional clients who made large profits flipping IPOs which Goldman had intentionally undervalued. Depositions in the lawsuit alleged that clients willingly complied with these demands because they understood it was necessary to participate in future hot issues. Reuters Wall Street correspondent Felix Salmon retracted his earlier, more conciliatory statements on the subject and said he believed that the depositions show that companies going public and their initial consumer stockholders are both defrauded by this practice, which may be widespread throughout the IPO finance industry. The case is ongoing, and the allegations remain unproven.

Nevertheless, the controversy around investment banks intentionally underpricing IPOs for their self-interest has become a highly debated subject. The cause for concern is that the investment banks advising on the IPOs have the incentive to serve institutional investors on the buy-side, creating a valid reason for a potential conflict of interest.

The post-IPO spike in the stock price of newly listed companies has only worsened the problem, with one of the leading critics being high-profile venture capital (VC) investor, Bill Gurley.

Compensation

Investment banking has been criticized for the enormous pay packages awarded to those who work in the industry. According to Bloomberg Wall Street's five biggest firms paid over $3 billion to their executives from 2003 to 2008, "while they presided over the packaging and sale of loans that helped bring down the investment-banking system".

In 2003-2007, pay packages included $172 million for Merrill Lynch CEO Stanley O'Neal before the bank was bought by Bank of America, and $161 million for Bear Stearns' James Cayne before the bank collapsed and was sold to JPMorgan Chase.Such pay arrangements attracted the ire of Democrats and Republicans in the United States Congress, who demanded limits on executive pay in 2008 when the U.S. government was bailing out the industry with a $700 billion financial rescue package.

Writing in the Global Association of Risk Professionals journal, Aaron Brown, a vice president at Morgan Stanley, says "By any standard of human fairness, of course, investment bankers make obscene amounts of money."