Investment Banking Explained: An Insider’s Guide to the Industry by Michel Fleuriet

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The Origins of Investment Banking
The NYSE traces its origins to shortly after the American
Revolutionary War, when a small group of New York brokers traded a
handful of securities on Wall Street. In May 1792, 24 brokers and
merchants signed the historic "Buttonwood Agreement," under which
they agreed to trade securities on a commission basis. In 1865, the
NYSE moved to its present location near Wall Street. In February
1971, the NYSE incorporated as a New York not-for-profit corporation
and was owned by its broker-dealer users, known as members or "seat
holders." The NYSE was demutualized and converted from a not-for-

profit entity into a for-profit entity when it merged with Archipelago on
March 7, 2006 and became a wholly owned subsidiary of NYSE
Group."1
Investment banking tends to be seen as an American phenomenon. Ask
anyone on Wall Street where investment banking came from. If the answer
is the Banking Act of 1933, then you asked the wrong person, a lawyer! If it
is May 17, 1792, and the birth of the New York Stock Exchange outside of
68 Wall Street under a buttonwood tree, then you spoke to an investment
banker (and an educated one). If your interlocutor says that she does not
know, then she is perfectly normal: nobody really knows where investment
banking came from, let alone what it actually is.
In the traditional sense, investment banking is buying original issues of
securities for resale to the public. But investment banks have many more
activities than this, and many of these businesses are much older than the
investment banks themselves.
Let's start with the financial products in which investment banks deal.
Investment banks underwrite and trade government bonds. They finance
themselves through repurchase agreements. They develop new instruments
of structured finance, the first of which were mortgage-based securities.
They participate in international bond syndications. They trade
sophisticated options.
Well, these very complex financial products have been around for more
than five hundred years—some of them for a few thousand years. And they
were developed by the European ancestors of today's investment banks to
provide financing in a society that had very little liquidity. Strangely
enough, the basic components of financial capitalism—paper money, joint-

stock corporations, and stock markets—are much more recent: two hundred
to three hundred years old. Invented by European banks, they are the pillars
of the industrialization of the economy.
Money, corporations, and stock exchanges are also at the origin of the
investment bank, which involves, simply put, an investment by a bank: the
purchase of new securities from their corporate issuers and their resale to
the public with a listing on a stock exchange. It should be noted that
American investment banks have played an important role here, often by
promoting a strategic vision for their corporate clients. For many people, it
is John Pierpont Morgan who invented (without using the word) investment
banking in the early 1900s.
The Glass-Steagall Act of 1933 separated commercial banking from
investment banking. It gave the big banks a year to choose between retail
banking and issuing securities. They could not do both. Those that chose to
specialize in financial markets and securities underwriting became known
as investment banks. Protected by law from competition from commercial
banks, American investment banks were able to concentrate on capital
market activities and on financing the economy. However, while investment
banking may have been refined in the United States after 1933, its origin
goes back to many centuries before.
The Great Ancestors: The Merchant Banker and the Financier
Success, as is well known, has many fathers, but failure is an orphan.
Investment banking has many fathers. The first father is the merchant bank,
a type of outfit that operated in the eighteenth century in France and later in
the United Kingdom. The term merchant banker is a contraction of
"merchant and banker." It meant a merchant who extended his activities by

Investment Banking Explained: An Insider’s Guide to the Industry by Michel Fleuriet