Investment Banks

With the recent financial crisis, we have seen the demise of the five major investment banks. Lehman Brothers went bankrupt. Bear Stearns was snapped up by JPMorgan Chase, Merrill Lynch got bought out by Bank of America, and Goldman Sachs and Morgan Stanley had to convert to bank holding companies just to stay in business.

(See definition ofBank Holding Company)

Investment Banks had provided financial services for governments, companies or extremely rich individuals. They raised funds by selling securities and offering advice to the financial industry on matters such as mergers and acquisitions.  While investment banks have only one regulator—the Securities and Exchanges Commission— traditional banks are supervised by a number of regulators including the US Federal Reserve. Traditional banks also have the luxury of access to unlimited liquidity provided by central banks, whereas highly leveraged investment banks, which were more likely to face liquidity problems, didn't enjoy that extra financial support.

It was the combination of having engaged in risky transactions, too much leverage and the credit crisis that brought about the demise of Investment Banks.

See our articleThe Future of Investment Banking.