Do Investment Banks Lend Anymore? Or is that a Thing of the Past?

The investment banking profession has been given a bad rep the past few years. Today, the public views these professionals as overpaid, greedy bankers – overly concerned with short-term profits and unapologetic for the havoc wrought from risky lending that contributed to the financial crisis. Yet, there was once a time when investment banks did what they were originally intended to do: raise debt and equity for corporations eager to grow. The role of investment banks has always been integral to the expansion of the American economy. In any economic system, some individuals or institutions hold excess capital while others are in need of capital investments. The investment bank serves an absolutely vital outlet where those holding excess capital are matched with those in need of capital. Thus, the investment bank, acting as the intermediary connection between the two, allows capital to be channeled to where it can be used most effectively (the parties in need of capital). In return, the individuals and institutions that borrow capital pay the lenders for the opportunity to borrow (an interest rate). The investment bank adds social value acting as the intermediary. The banks have facilitated immense economic growth as those corporations borrowing money have expanded operations, hired workers, and invested in research and development.

The problem today is that the banks like Goldman Sachs, Morgan Stanley, Deutsche Bank and many others no longer serve the same function they once did. Instead of raising capital and debt for corporations, many banks have shifted their focus to proprietary trading (trading on their own accounts) and commission based trading (creating marketplaces and trading for their clients). What we typically think of as investment banks are no longer investment banks – they are dealers and traders. For example, take a look at the revenue breakdown of Goldman Sachs by business activity. In 1999, investment banking represented 33% of net revenue. Last year, investment banking represented only 11%, and in a dramatic shift trading/dealing accounted for over 76% of Goldman’s net revenue. Why are we still calling Goldman Sachs an ‘investment bank’ when it doesn’t lend money anymore?

Goldman Sachs Revenue by Business Activity, 1999 & 2009