The history of investment banking in the United States is a long and illustrious one. Investment banking firms acted as catalysts in much of the conversion of the agricultural economy of the early United States to the industrial economy of the modern age.
UNITED STATES v. MORGAN, 118 F. Supp. 621 (S.D.N.Y. 1953)
Many large corporations sell common stock to the public through a firm commitment underwriting. In this type of underwriting, a broker-dealer or a syndicate of several broker-dealers will actually purchase at an agreed upon discount all of the securities of the issuer as soon as the registration becomes effective with the Securities and Exchange Commission. The broker-dealers then resell the securities to the public investors at the full offering price.
Small corporations often must sell common stock to the public through a best efforts underwriting. This is not an underwriting as such, but a process in which the broker-dealer or broker-dealers act as agents of the issuer in selling the securities directly to the public investors at the full offering price, charging an agreed upon commission to the issuer.
There are variations to the best efforts underwriting. One variation is the all or none. Here, the broker-dealers agree with the issuer to sell all of the securities within a certain time period or return all of the funds to the investors and no sales will take place. Another variation is the part or none. Here, the broker-dealers agree with the issuer to sell a certain percentage of the securities within a certain time period or return all of the funds to the investors and no sales will take place. If the sale of securities timely reaches the necessary percentage, the offering of the remaining securities may continue.
Investment banking firms offer various products to investors. They were important in the offering of tax shelters to investors during the 1970s and the early 1980s.
One of the major factors in the tremendous proliferation of tax shelter offerings in the 1970s and the early 1980s was the entrance of the large investment banking firms into the area. Early tax shelters consisted of offers made directly to wealthy individuals on a small, private basis by the promoters and their affiliates. As the demand for tax shelter offerings grew with the growth of the number of wealthy people needing them, the investment bankers realized what an important segment of business tax shelters could become. The investment bankers then started offering tax shelters in both public and private deals.
Investment banking firms have also been important participants in the raising of venture capital for new companies. Such venture capital usually originates with offerings to a few sophisticated investors in private, directly negotiated deals.
Certain investment banking firms have become extremely active in attempts to service their investment banking clients, especially in the age of the hostile takeover or leveraged buyout. Because these clients often need large amounts of cash very quickly, some firms have provided bridge financing directly to the client company. The firm will then be repaid when the company registers and sells a securities offering of debt in a conventional underwriting. Although these bridge loans schedule repayment in a short amount of time, the investment banking firms have their capital at a substantial risk during the interim.
These same investment banking firms might take large equity positions in some of the combined companies created by hostile takeovers or leveraged buyouts that places them in a position of being merchant bankers. While merchant banking has long been traditional in Europe, such activity does create additional risks to the capital of these investment banking firms in the United States.
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act of 1999. The Senate and the House of Representatives of Congress had previously passed this legislation. The purpose of the legislation was to remove restrictions placed on banks and securities firms during the New Deal. That legislation was the Glass-Steagall Act of 1933. The result of that legislation was to separate commercial banking from investment banking. Sections 16, 20, 21, and 32 provided the restrictions.
Over the past several decades, various interpretations by government regulatory agencies have gradually eroded the restrictions. Banks consequently have become more active in the securities business. However, banks wanted the restrictions repealed for domestic and international competitive reasons. As a result, after a number of unsuccessful attempts in the past several sessions of Congress, the Gramm-Leach-Bliley Act is now law. The Act repeals Sections 20 and 32 of the Glass-Steagall Act. Banks will now have the ability to enter into many aspects of the securities business and the insurance business. In addition, bank holding companies, securities firms, and insurance companies will be able to combine operations. It is expected that the recent trend toward consolidation of such companies by mergers and acquisitions into financial supermarkets will continue at an increased pace.
LEHMAN BROTHERS HOLDINGS, INC., Form 10-K Annual Report (February 28, 2000)
GOLDMAN SACHS GROUP, INC., Form S-1 Registration Statement (April 5, 2000)
SHAW v. DIGITAL EQUIPMENT CORP., 82 F.3d 1194 (1st Cir. 1996)
© 2000 Harry Stansbury
 See VINCENT P. CAROSSO, INVESTMENT BANKING IN AMERICA 1‑25 (1970).
 See PAUL HOFFMAN, THE DEALMAKERS 1‑32 (1984); STEWART H. HOLBROOK, THE AGE OF THE MOGULS 19, 152 (1953); MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW, 1780‑1860 31‑42 (1977); see also Eugene D. Genovese, Book Review, 91 Harv. L. Rev. 726, 726-28 (1978) (reviewing MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW, 1780-1860 (1977)).
 See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 77-78 (2d ed. 1988).
 See 1 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 324-41 (3d ed. 1989).
 See RICHARD W. JENNINGS & HAROLD MARSH, JR., SECURITIES REGULATION 35-36 (6th ed. 1987).
 See RICHARD W. JENNINGS & HAROLD MARSH, JR., SECURITIES REGULATION 32 (6th ed. 1987).
 See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 85-86 (2d ed. 1988).
 See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 86 (2d ed. 1988); 6 LOUIS LOSS, SECURITIES REGULATION 3681 (2d ed. Supp. 1969).
 See RICHARD W. JENNINGS & HAROLD MARSH, JR., SECURITIES REGULATION 30 (6th ed. 1987).
 See 1 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 342 & n.45 (3d ed. 1989).
 See 1 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 342 n.45 (3d ed. 1989); WHEN CORPORATIONS GO PUBLIC 78 (Carlos L. Israels & George M. Duff, Jr. eds., 1962).
 See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 86 (2d ed. 1988); 4 LOUIS LOSS, SECURITIES REGULATION 2296-97 (2d ed. Supp. 1969).
 See, e.g., CHARLES RAW, BRUCE PAGE & GODFREY HODGSON, "DO YOU SINCERELY WANT TO BE RICH?" 338‑46 (1971); Note, Procedures and Remedies in Limited Partners' Suits for Breach of the General Partner's Fiduciary Duty, 90 Harv. L. Rev. 763, 763 & n.1, 765 & n.12, 767 (1977). See generally Eleanore Carruth, The New Oil Rush in Our Own Backyard, Fortune, June 1974, at 154; The Rockers Are Rolling in It, Forbes, Apr. 15, 1973, at 28; Roundtable Discussion: Tax Sheltered Investments, Wall St. Transcript, June 12, 1978, at 50,944; Dana L. Thomas, Outwitting Uncle Sam, Barron's, Sept. 19, 1977, at 3.
 See Andrew Patner, Real Estate Syndicator Spins an Intricate Web And Gets Tangled in It, Wall St. J., Feb. 1, 1990, at A1.
 See KIM I. EISLER, SHARK TANK 147‑48 (1990); DAVID MCCLINTIC, STEALING FROM THE RICH 25‑29 (1977); Raymond Brady, Personal Money Machine of John King, Dun's, June 1970, at 34.
 See ADAM SMITH, SUPERMONEY 15‑18 (1972).
 See Michael Brody, Gimme Shelter, Barron's, Sept. 25, 1978, at 4.
 See Ellen J. Pollock, Nightmare On Golden Pond, Am. Law., Mar. 1983, at 97.
 See STEPHEN FENICHELL, OTHER PEOPLE'S MONEY 12‑20 (1985).
 See Wall Street's New Fashions, Forbes, July 15, 1971, at 22.
 See FERDINAND LUNDBERG, THE RICH AND THE SUPER‑RICH 402‑03 (1968); JAMES PRESLEY, A SAGA OF WEALTH 231-32 (1978); JACQUELINE THOMPSON, THE VERY RICH BOOK 328‑30 (1981); DANIEL YERGEN, THE PRIZE 575 (1991). See generally David T. Maguire, Scamalot: The Land of Tax Shelter Prosecution, 70 A.B.A. J. 52 (July 1984).
 See JAMES B. STEWART, THE PROSECUTORS 233‑42 (1987).
 See CARY REICH, FINANCIER 130‑63 (1983). See generally Laura Landro, Overseas Distributor Takes On Big Studios By Doing Own Films, Wall St. J., Apr. 16, 1985, at 1; Laura Sachar, Testing the Limits In Limited Partnerships, Fin. World, July 12, 1988, at 30.
 See PAUL HOFFMAN, THE DEALMAKERS 182 (1984); JOSEPH WECHSBERG, THE MERCHANT BANKERS 247-49 (1966); Larry Light & Joan O'C. Hamilton, Rewriting the Rules of Venture Capital, Bus. Wk., July 19, 1993, at 70; Has the Bear Market Killed Venture Capital?, Forbes, June 15, 1970, at 28.
 See WILLIAM D. BYGRAVE & JEFFRY A. TIMMONS, VENTURE CAPITAL AT THE CROSSROADS 38-43 (1992); DOUGLAS G. CARLSTON, SOFTWARE PEOPLE 191-95 (1985); PETER COLLIER & DAVID HOROWITZ, THE ROCKEFELLERS 290-302 (1976); THOMAS M. DOERFLINGER & JACK L. RIVKIN, RISK AND REWARD 12-13 (1987); JACQUELINE THOMPSON, FUTURE RICH 37‑38 (1985); Note, Community Development Corporations: Operations and Financing, 83 Harv. L. Rev. 1558, 1626-27 (1970); Steven S. Anreder, Up the Entrepreneur, Barron's, Aug. 25, 1980, at 4; Connie Bruck, Paul Brountas At The Top, Am. Law., Oct. 1988, at 158.
 See CONNIE BRUCK, THE PREDATOR'S BALL 10-20 (1988).
 See John J. Madden, Investment Banks Adopt New Role With Bridge Financing, N.Y. L.J., Mar. 16, 1987, at 29.
 See BRYAN BURROUGH & JOHN HELYER, BARBARIANS AT THE GATE 156 (1990).
 See Tom Bancroft, Psst!!! Wanna Buy a Bridge?, FW, Apr. 3, 1990, at 26.
 See RON CHERNOW, THE HOUSE OF MORGAN 694-95 (1990).
 See PAUL FERRIS, THE CITY 76-84 (1960); JOSEPH WECHSBERG, THE MERCHANT BANKERS 8-20 (1966); DEREK WILSON, ROTHSCHILD 16-27 (1988).
 See Amy C. Pershing, The Perils of Merchant Banking, Institutional Inv., Feb. 1988, at 45.
 Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338.
 Glass-Steagall Act of 1933, 12 U.S.C. secs. 24, 78, 377-378 (1988).