Investment banks are such kind of banks that profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity and bond), as well as providing advice on transactions such as mergers and acquisitions.
In the U.S., an advisor must be a licensed broker dealer to perform these services, and is subject to the U.S. Securities and Exchange Commission (commonly known as the SEC) regulation. Until the late 1980s, the United States and Canada maintained a separation between investment banking and commercial banks.
A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.
Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is referred to as the "sell side."
Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side." Many firms have buy and sell side components.
The Bear Stearns Companies, Inc., based in New York City, was one of the largest global investment banks and securities trading and brokerage firms prior to its collapse in 2008. Beginning in 2007, the company was badly damaged by the subprime mortgage crisis. In March 2008, the Federal Reserve Bank of New York provided an emergency loan to try to avert a sudden collapse of the company. The company could not be saved, however, and was sold to JPMorgan Chase for as low as ten dollars per share.
Merrill Lynch & Company Inc., the third largest U.S. investment bank, is a global financial services firm. It survived wars and the Great Depression, but succumbed as an independent company to the mortgage meltdown that began in mid-2007. On Sept. 14, 2008, Merrill announced that it had agreed to sell itself to Bank of America Corp. for roughly 44 billion U.S. dollars.
Lehman Brothers Holdings Inc. was a global financial-services firm prior to its bankruptcy and sale in 2008. On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection; the filing marks the largest bankruptcy in U.S. history. The following day, Barclays plc announced its agreement to purchase , subject to regulatory approval, Lehman's North American investment-banking and trading divisions along with its New York headquarters building. On September 20, 2008, a revised version of that agreement was approved by Judge James Peck.
The last two major bulge bracket firms on Wall Street were Goldman Sachs and Morgan Stanley until both banks elected to convert to traditional banking institutions on Sept. 22, 2008, as part of a response to the U.S. financial crisis.
Citigroup, Deutsche Bank, HSBC, JP Morgan Chase, and UBS AG are "universal banks" rather than bulge-bracket investment banks, since they also accept deposits (not all of them have U.S. branches).
(Agencies October 15, 2008)