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Investment Banker
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

A firm engaged in investment banking, i.e., financing the capital requirements of business through the investment markets as distinguished from seasonal or current requirements normally financed by means of bank or finance company credit.

The investment banker is the middleman between issuers of securities requiring capital (public bodies as well as private business firms) and the ultimate investors, institutional and individual, who have money to invest.  They facilitate the conversion of available savings into investment and thus perform the important economic function of improving the flow of needed capital.  New and expanding enterprises; reorganized, merged, or consolidated firms; and governmental units look to the investment banker for the financing of their capital requirements.  The two basic types of UNDERWRITING are negotiated underwriting, in which the business is handled through a particular investment banking firm (the "originator"), and competitive bidding, in which the issuer specifies bidding specifications and invites competing investment banking groups of firms to bid, the business being awarded to the qualified bidders who submit the lowest net cost of money bid (in the case of bonds, net of premium or discount on principal plus interest cost; in the case of stocks, highest net bid).  Rule U-50 of the Securities and Exchange Commission requires competitive bidding for public utility securities issued under the jurisdiction of the commission.  The Interstate Commerce Commission requires competitive bidding for railroad securities.  State and municipal obligations also are subject to competitive bidding, as are new issues of Treasury bills of the U.S. government.

The purchase agreement, between the issuer and the purchase group of investment banking firms formed by the originating firm to share the liability assumed, may involve one of three basic arrangements as to liability to the issuer; firm underwriting, in which the purchase group purchases the issue from the issuer and is accountable for net proceeds to the issuer on the settlement date in full:  "best efforts" basis, in which there is no assumption of liability by the investment banking group, the distribution being on an agency basis for the account and risk of the issuer; and standby basis, in connection with offerings of rights to stockholders by issuers, in which the investment banking group assumes full liability for any securities unsubscribed by the stockholders by exercise of the rights.  Competitive bidding involves firm assumption of liability by the winning bidders.  The purchase group agreement (agreement among the underwriters) specifies the participation by each member of the purchase group in the liability to the issuer by reference to the purchase agreement in which such participation is detailed.  Such groups or syndicates of firms (joint ventures for the purposes of the deal concerned) are usually headed by the originating firm, which names the SYNDICATE manager.

Resort to a syndicate of firms is also practiced for maximum distribution power in the formation of the selling group agreement (offering to selected dealers) by the syndicate manager on behalf of the purchase group.  Selling group members are specified "concession" from the public offering price (sharing in the underwriting "spread" between net price to the issuer and public offering price), and they in turn are permitted to offer a reallowance to other dealers, not members of the selling group, to further add to distribution power.

Investment banking practice was importantly modified by the requirements for registration of public offerings with the Securities and Exchange Commission, pursuant to the SECURITIES ACT OF 1933, involving a waiting period (normally 20 days but in practice usually longer) between filing and the effective date for public sale.

Antitrust Suit Against Investment Bankers.

The antitrust suit brought under the Sherman Act by the Justice Department against 17 leading investment bankers, initiated October 30, 1947, in the Federal District Court in the Southern District of New York, was dismissed September 23, 1953, after a trial lasting from November 28, 1950, to May 19, 1953.  The case is of interest for its bearing on conventional relationships among investment banking firms.

The government alleged a conspiracy and combination formed about 1915 and in continuous operation thereafter whereby the defendants as a group developed a system to eliminate competition and monopolize the "cream of the business" of investment banking.  Bases for this charge were the alleged respecting by the defendant firms of the entitlement of a defendant firm that first managed an underwriting for an issuer to manage all future security issues of that issuer; the understanding among the defendant firms that a defendant firm once participating as a member of a purchase group for an issue is thereafter entitled to continue such participation in all future issues of an issuer; and a reciprocity agreement among the defendant firms to exchange participations with one another in purchase groups managed.  As a means of assuring issuer control, the defendant firms were alleged to have obtained control over the financial and business affairs of issuers by giving fee financial advice to issuers, by "inflitrating" the boards of directors of issuers, by selecting friendly officers, and by utilizing their influence with commercial banks handling business of issuers.

The court rejected motions to amend the complaint so as to charge that syndicate price fixing the agreement of associated underwriters not to sell the offered security at any price except the fixed public offering price during the distribution period - is illegal and proof of a restraint of trade conspiracy.  The complaint was dismissed on a finding that no combination, conspiracy, or agreement was shown to exist.  Since amendment of the complaint as to price-fixing was not permitted, the court's decision commenting that the fixed price of public offerings gives no offense to the Sherman Act was merely obiter dicta.


BLOCK, E.  Inside Investment Banking, 1988.

CONNER, D.R., and FIMAN, B.G.  Making the Cultural Transition to Investment Banking."  Bankers Magazine, January/February, 1988.

ECCLES, R.G. and CRANE, D.B.  Doing Deals:  Investment Banks at Work.

EPSTEIN, R.  Investment Banking, 1987.

HOWE, J.T.  Junk Bonds:  Analysis and Portfolio Strategies, 1987.

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