Research On The Changes Of US Investment Banks Since 1970s

United States suffered from the subprime crisis, financial crisis and the economic recession within 2007-2009. Many heavyweight financial institutions are forced to accept government assistance because of bankruptcy or financial difficulties. USA, EU and Japan had announced the economic recession one by one by the end of 2008. In the decades before that, as the driving force of economic growth, the U.S. financial system is highly effective in coordinating supply and demand of capital and in allocating resources. Prior to 2007, the U.S. financial industry is the object of study and emulate for other countries because of its perfect and efficiency, but all these are to be as much praised as blamed with the outbreak of the crisis.Chaos of the crisis was finally over, it is necessary to reflect the formation and occurrence of the crisis. Investment banking industry in the crisis became a disaster area. Because investment banking is the core in the financial system and even in the economy, it has important theoretical and practical significance to examine the changing process of U.S. investment banking, analyze the background and motivation of the changes and study the impact and the effects of investment banking's changes.U.S. investment banking started from brokerage business of the late 18th century and rapidly rise in the second half of the nineteenth century with the development of American industrialization. It has gone through free mixing stage, independent investment banking stage, mixed operation stage and finance holding company stage. Particularly since the 1970s investment banking's development and changes had far-reaching impact.Within 1970s, the U.S. financial markets took place unprecedented changes, interest rates and exchange rates often fluctuated, high inflation became the first economic problem. These changes made companys' financial position very unstable. Meanwhile, the regulatory philosophy had changed, and regulatory rules gradually moved to deregulation, the tide of economic and financial liberalization rose, economy became more competitive, the market was increasingly global, multinational business expanded to many countries. All these made the company finance and investment and risk management very complicated. Regulatory authorities relaxed the limitation of the integration between the various sector within the financial industry, and finally confirm the mixed operation by the Financial Services Modernization Act. Essentially, the changes of investment banking are parts of the market environment changes, but changes of investment banking further promote the market changes, thus contributing to the regulation change, in turn regulatory changes further promote investment banks'change. This creates a dynamic process with mutual influence and promotion.With the changes of the market and regulation, the investment bank's business scope has gradually expanded, the firms gradually focus on the new business especially trading, and the importance of traditional business is declining. There are several reasons contributing to the rise and large development of new business: changes of financial markets competition and regulation; the revolution in investment theory and the development in financial instruments pricing theory and modern information technology. Changes of investment banking business show the following characteristics: the importance of trade becomes increasingly prominent; business has become to specialization, mathematicization and modelization and all type of risks are faced.Meanwhile, the U.S. investment banking has changed their organizational form, namely from partnership to the stock company. This shift has a major impact on the governance structure of investment banking, especially asymmetry between incentive mechanism and restrictive mechanism has led to serious moral hazard and conflict of interest. On the other hand, the investment banks expand to the commercial banks'business continuously which forms investment-bank-holding- company. It is the banking business conformed by investment-bank-holding- company that is actually in the regulatory vacuum, which results in the accumulation of risks. In addition, M&A between investment banks and between investment banks and other financial institutions rise one after another, but the performance of M&A is uncertain, and it is easy to rise the moral hazard of too big to fall.Asymmetric financial development is the source of financial instability after 1980s. 2007-2009 financial crisis is a concentrated outbreak of this imbalance. From a institutional perspective, financial regulation always lags behind the changes in the financial services, and under the guidance of the mainstream philosophy of deregulation, the inadequate supervision of U.S. financial industry is widespread, which results in anomie and disorder in financial operations; regulatory misconduct and the too big to fall moral hazard also promote the further financial imbalances. From a technical level, the investment bank's innovation of financing instruments, highly leveraged transactions take on the important responsibility to the crisis. In addition, asymmetry between incentive mechanism and restrictive mechanism of investment banks lead to significantly speculative drive.The Crisis got rise of 2010 Wall Street Reform and the Consumer Protection Act introduced, so U.S. investment banking will face a relatively stringent regulatory environment.China's investment banking industry started late, after 20 years of development it has made great progress, and has been involved in a range of international competition. However, compared with U.S. investment banking, China's investment banks are small, over-reliance on traditional business, and mergers, investment and other new business develop slowly; besides, most are limited company, and the internal ownership structure is more concentrated, internal controls mechanisms are weak. Mixed operation has been developed within a certain range,forming complex financial holding group. The experience and lessons of U.S. investment bank could inspire to the development of China's securities companies. First, we must adhere to the basic principles of financial innovation servicing the real economy, and maintain a balance between innovation and regulation. Secondly, we must establish the balance mechanisms of incentive and restraint in the internal governance of securities companies, and avoid imbalance of "strong incentives, weak constraints" and other principal-agent problem. Finally, supervision should be strengthened in mixed operation groups.