Investment Banks: Why Do We Need Them?

If you asked an average American on the street to list the top five most disliked professions it would be very likely that something along the lines of “Wall Street Investment Banker” would be high on the list. Investment bankers are often perceived as lazy, unoriginal, and greedy. People think they reap huge wages and bonuses from the hard work of other individuals, corporations, and even countries. This perception has only been reinforced since the financial crisis that started in 2007.

The United States, and really the entire developed world, is still in the midst of recovering from the worst recession in decades that came about largely because of the actions of investment banks and their regulators. Sure, it is easy to see the bad that comes with the industry and even the negative perception that investment bankers receive is understandable. In reality however, investment banks do a lot for the economy, actions that allow other individuals and companies make a living.

Most everyone is familiar with the role banks such as Wells Fargo, Bank of America, and BB&T play in consumer’s lives. Their banking services allow us to save money, pay bills, and manage our income. In other words, these banks provide services that allow the average consumer to live a more efficient, comfortable, and simple life. Investment banks are similar in a way because the services they provide to companies allow them to improve and become more profitable. By definition an investment bank is “a specific division of banking related to the creation of capital for other companies”. In other words, when a company needs capital to invest in a new technology, a new plant, or any other major investment that requires a large sum of money, they turn to an investment bank to help them structure a way to raise that capital. Since large investments, such as building a new facility, require large amounts of money it is unlikely that most companies have enough cash laying around to fully pay for it. Instead they will work with an investment bank to raise the funds, for example, by issuing stock for individuals to purchase. Investment banks provide the resources, knowledge, and experience to structure and implement these deals.

While the actual dealings and details of these deals can be extremely complex, their purpose and implications are fairly straightforward. Without the services provided by investment banks companies would have an extremely difficult time raising the funds they need to finance large investments. Large investments by corporations are an extremely integral part of the economy. These investments drive progress and innovation, and thereby drive the economy forward.

Investment banks have undeniably earned some of the bad reputation they receive. Some investment bankers have taken advantage of those counting on their services as well as played a significant hand in one of the greatest financial crises of all time giving the industry some black spots. They however, also play a vital role in our lives. Look behind any major corporation in America and you will see an investment bank that helped them achieve the level of success they now enjoy. While it is important to have regulations and policies in place to oversee the industry, one cannot simply dismiss the importance of investment banks in the modern economy of the United States.

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

Latest posts by Stephen Padgett (see all)