Investment banking explained( History, Lifestyle)

Investment banking is one of the most profitable areas in the financial industry. In 2022, investment banks made over $39 billion in sales, just in the US. If investment banking sounds like a foreign language to you, then you are not alone. 

This high-stakes industry continues to amaze even banking professionals with its complexity, despite salaries hovering around $140,000 per year. It's no surprise that so many people dream of becoming Wall Street's next wolf, others are just curious about how this glamorous industry works. 

Unfortunately, it's not all yachts, nightclubs and champagne, the job itself is extremely stressful, and some investment bankers work more than a hundred hours a week, 

so what is investment banking, why is it lucrative, and how are investment banks different from commercial banks?

Before we explain how investment banking works, let's turn back the clock to see how it all began with commercial banks in the United States in the early 19th century.

Performed the functions we associate with investment banks today, but everything changed during the Civil War—the war effort as such, the US government became one of investment banking's earliest clients. 

When the government needed to issue bonds to raise enough money to support their fast-growing economy and complete infrastructure projects such as building the railroad. 

Bonds are like IR used between lenders and borrowers, typically used to fund expensive projects. In many cases, investment banks would buy these bonds and then resell them to private investors at a profit. 

Today, investment banks do virtually the same thing, just with different stakeholders. The question is, where these billions of dollars in revenue come from?

The business model is actually pretty simple. Investment banks buy assets of monetary value, also known as securities, and then resell them to third parties for a fee. This process is called underwriting. 

So, why don't clients and investors just save money and close the deal? 

One of the biggest advantages of this type of deal is that the middleman is responsible for distributing the securities, if he cannot find enough investors, they have to keep some securities themselves. 

When you think about it, investment bankers are basically risk-taking intermediaries to Clients and investors. It's not just for investment banks, Commercial banks also take risks, but that's the difference.

Commercial banks.

Commercial banks deal with individuals and small to medium-sized businesses.

By issuing smaller amounts of money, such as individual mortgages and small business loans, they make their profits from the interest they charge. 

On the other hand, investment banks take much bigger risks they take with big companies and high-risk startups that act as a bridge between companies and investors in process they can earn a huge amount in fees. 

All of this sounds great in theory but let's face it investment banking doesn't have a good one Reputation We've all experienced one of the worst financial disasters in history, the subprime mortgage crisis of 2008. 

Here's What Happened In 2001, the Federal Reserve increased bank liquidity by lowering the federal funds rate, allowing US banks to lend more loans.

To achieve this, the banks lowered their standards and started lending to just about anyone, regardless of whether they had a job or any money at all. 

Of course, commercial banks couldn't continue lending indefinitely to make room for new borrowers, they sold their old loans to investment banks. 

Investment banks repackaged these subprime loans and resold them to investors without disclosing how unsafe these loans were at the time. It didn't seem to matter, it was a big party that borrowers bought houses from, investors benefited from, and the banks kept theirs loans sold.