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AOFPrinciples of Finance

Unit 3, Lesson 9

Evolution of Investment Banking

Investment banking began with the financing of governments

• Long-term loans were made to rulers, governments, and certain industries.

• Investment companies played a leading role in financing industrial development.

• The American Civil War was financed through bonds.

Under what conditions would you lend money to the government?

Market panic forced a change in investment banking

• In 1873, the prominent investment firm Jay Cooke and Company declared bankruptcy. An economic panic swept the nation.

• A series of bank “runs” and a lack of confidence in the nation’s currency system fueled the Panic of 1907.

• In order to prevent further “panics” the Federal Reserve System was established.

How confident are you in the banking system of today? Why?

Federal Reserve System provides stability

• The Federal Reserve Act of 1913 was passed in an attempt to bring stability to the economy.

• The Federal Reserve Act created the Federal Reserve System, the central banking system of the United States.

• The Federal Reserve Act brought stricter regulations and increased supervision to the banking system.

Do you think banks should be controlled by the government? Why?

In the 1920s, the world economy fluctuated dramatically

• The “Roaring Twenties” marked a time of economic growth and prosperity. Stocks quadrupled in value!

• In 1929, the bubble burst and the stock market crashed. Stocks dropped to only 20% of their value.

• The stock market crash of 1929 helped fuel the Great Depression.

As a result of the stock market crash of 1929, new laws and regulations were created to stabilize the economy

• The Federal Securities Act of 1933 was created to ensure that consumers were given an accurate idea as to the type of securities they were purchasing and their value.

• The Glass-Steagall Act separated the services of investment and commercial banks and created the Federal Deposit Insurance Corporation.

Do you know the current amount that the FDIC guarantees? How much is it?

Industry continues to grow and experience more restrictions

• During the 1940s the investment banking industry expanded.

• In 1975 the SEC ended the fixed-rate brokerage fee.

• In 1999 the Gramm-Leach-Bliley Act repealed part of the Glass-Steagall Act.

Do you think the Glass-Steagall Act should have been repealed? Explain your thoughts.

Investment banking industry continues to evolve

• Due to the subprime mortgage crisis of 2008 and 2009–2010, large investment banking firms became virtually nonexistent.

• “Bulge bracket” investment banks evolved into financial holding companies.

• The financial crisis was marked by federal bailouts and an overall lack of consumer confidence.