Posts Tagged ‘Training’

The Ins and Outs of Investment Banking: Part I

Tuesday, November 17th, 2009


What is investment banking?

Companies need cash in order to expand and grow. Investment banking, also known as I-banking claims the responsibility of raising capital through the selling of securities (debt and equity) for these companies and advises them on financing and merger alternatives.  Some of the biggest players are Goldman Sachs, JP Morgan and Morgan Stanley.  (For a complete list of I Banks, please check the investment banking link on the forum)  Most of these I-banks are headquartered in New York City, the investment banking capital of the world.

The Breakdown

Most investment banks can be broken down into these areas:

  • Corporate Finance:  The bread and butter of an investment bank, corporate finance can be broken down into two areas: mergers and acquisitions and underwriting.  In M&A, bankers assist in the negotiation and structuring of mergers between companies.  Underwriting involves the process of raising capital for firms via selling either equity (stocks) or debt (loans and bonds).
  • Capital Markets: The role of this department is to manage the interaction of bankers in corporate finance with those in sales and trading.  Professionals are responsible for understanding recent transactions and using this information to formulate new transactions.
  • Sales:  Salespeople take the role of the classic retail broker (develops relationships with the individual and sell stock/stock advice), the institutional salesperson (manage larger groups of assets such as pension funds or mutual funds), or the private client sales (provide money management services for very wealthy individuals).
  • Trading:  Responsible for facilitating the buying and selling of stocks, bonds, and other securities.  Traders have two distinct roles in a company: (1) providing liquidity, where they act as a market maker by providing clients with the ability to buy and sell a security on demand, and (2) proprietary trading: taking on a trading position on behalf of the firm.  In proprietary trading, traders risk the firm’s principal.
  • Research: Analysts follow stocks and make recommendations to outside investors on whether to buy, sell, or hold securities.  Analysts typically cover one industry and will focus on approximately 20 companies.
  • Syndicate: This group is the link between corporate finance and sales.  This group exists to facilitate the placement of securities in a public offering.  Syndicate is also referred to as primary sales as securities are placed in the hands of the investors for the first time.

Commercial Banking and Investment Banking: What’s the difference and why do some firms have both?

Commercials banks: May legally take deposits for checking and savings accounts from customers.  The actual process is relatively straight forward- you (the customer) deposits cash into the bank which in turn pays you an interest rate (ex: 1-4%).  The bank then loans that money out to other customers looking to buy a house or finance a car at a higher interest rate (7-14%).  The bank’s profit is generated by charging a higher interest rate to borrowers than the interest rate they pay to depositors.  Examples of commercial banks include Bank of America, Chase, and Wachovia.  All loans made between commercial banks and individuals are contracts and are legally binding.  The terms of the contract (how much the bank will lend you and at what interest rate) is determined by the bank based largely in part according to your credit history.

Investment Banks: Unlike a commercial bank, an investment bank does not have an inventory of cash deposits to lend out to individuals or corporations.  Rather, investment banks work to match buyers or securities to sellers.  They also offer advisory services on mergers and acquisitions.  However, larger corporations that are in need of cash may also seek an I-bank to sell equity or debt (stocks or bonds) on behalf of the company to the general public.

Thanks to the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, banks can now consolidate both commercial and investment banking into one firm (i.e. merger of Citicorp and Travelers Group into CitiGroup).  The largest bank with both sides today is JP Morgan after it merged with Chase bank.  The synergies created with merging both sides have caused these companies to grow at astounding rates.

Landing a Job in Investment Banking

The first step to obtaining a position in investment banking is having an understanding the industry.  Finance is a very competitive field with a lot of pressure and long hours.  However generously compensated through large salaries and equally great bonuses, I-banking is incredibly competitive and imposes a lot of pressure on employees.  Make sure to go on information interviews, read publications, and ask questions.  Some questions to ask include:

  • What is a typical day like?
  • What are the hours each week?
  • What is the future of the industry in the next five years?
  • What sectors of finance are hiring now?
  • How easy is it to move horizontally in the firm?  Vertically?
  • What is so exciting about this job?
  • What is the corporate culture like?
  • What is the typical career track?

If this is a field that seems appealing, checking in with career services, alumni, friends, and family is the next step.  Many finance companies recruit at targeted business school and accept resumes through the career center.

After you’ve landed the interview, the most important part is making a good impression.  At this point, you can be assured that the recruiter already thinks you have some basic skills necessary for the job.  Don’t be put off by the pressure and prepare as best you can by reading about the firm and the industry (see publications below).  Also, be confident as a career in I-banking making countless multi-million dollar decisions and your recruiter wants to see that you are confident in yourself to handle this position.

The Hiring Process

There are generally two parts to any finance interview which can be broken down into “the fit part” and “the technical part”.

Fit:  This part of the interview involves the recruiter assessing your personality and deciding if you are a good fit with the company.  Companies typically have very strong cultures that differentiate them from the competition and the interviewer needs to know if you share the same values and that you are the type of person he/she would like to work with.  Remember to emphasize your work ethic and dedication to the job.  However, being overly enthusiastic about something like long hours is overdoing it and your recruiter will see right through you.  Instead, be honest and acknowledge some of the negatives and your ability to deal with them.  Also, this is a very analytical field and requires a lot of number crunching.  Make your interviewer aware of these skills through past experiences, school work, or other jobs.

Technical:  This part of the interview is an evaluation of your finance knowledge.  If you do not do well in this part of the interview, the recruiter may either assume that you have no interest in this field, or that you are not competent enough to handle the position.  There are certain topics your interviewer may question you on including valuation techniques, basic accounting concepts, market valuation, discounted cash flow, capital asset pricing model, and NPV.   Your recruiter may also give you scenarios and ask you to work through a problem (also known as a case interview.  Please see “Mastering the Case Interview”)

Before any interview always remember to prepare properly through research of both the firm and the industry.  Know your position and what would be expected of you.  Also come prepared with questions to ask your interviewer to show you have an interest in the position and to get some more inside information. (Don’t ask questions that can be answered by visiting their website)  Practice in front of a mirror, friends, coworkers, or family.  Most important of all, be confident.  Recruiters want to see that you can handle this high stakes, high pressure job.

Trends in I-Banking

Bank Mergers: Beginning in 2003 with the acquisition of FleetBoston by Bank of America, M&As became the latest trend in I-Banking.  The following year JP Morgan became the second largest bank by acquiring Chase.  That same year, Wachovia acquired SouthTrust Corp.  More recently, there have a been a few notable M&As in the financial services industry that have caused several changes in banking structure.  For example, in 2008 Bank of America announced its acquisition of Merill Lynch, creating a firm with a breadth of financial services and increased opportunities to its customers.

In demand Skills: With the financial services industry slowly starting to recoup as the economic crisis slows, certain skills are in demand.

  • Financial Institutions Group Bankers:  Those that specialize in arranging mergers and acquisitions and other deals between insurance companies, banks, and distressed pools of capital.
  • Trading Technology: There is a growing need for those with the technology skills to devise and code trading models.  The growth of high frequency algorithmic trading may account for up to 40% of daily stock exchange volume.
  • Fundamental Credit Analysis: There is a high demand for in house credit skills due as participants of trading are still wary of credit risk.

For more insight into the I-Banking world, the following publication and sites are available:

  • Wall Street Journal
  • Business Week
  • The Banker (online)
  • Investor’s Business Daily/
  • Kiplinger Magazine
  • Forbes
  • Money Magazine
  • The Financial Times

~Catherine B.

For more information on the field of I-banking and detailed analysis of positions, please visit Vault.

Common Interview Questions

Sunday, November 15th, 2009


This covers general interview questions encountered in most job interviews.  While these are generic questions, the answers should still remain relevant to the position being sought and should reflect a desire to work in the specific industry.

1. Tell me about yourself.

The most common interview and probably the hardest to answer.  This is a chance to give the interviewer a very brief rundown of your past including education, previous job titles, goals and experiences all specifically related to the position in which you are applying for.

2. What specific goals have you set for yourself/where do you see yourself in five years?

Striking a balance between honesty and ambition is key.  Honesty is important as interviewers can often tell when a candidate is lying to them, but keep the goals relevant to a professional career and most importantly, to the job you are applying for.  For example: “I hope to stay at the company and expect that in five years, I’ll make a significant advance in the organization.”

3. How has your college experience prepared you for a career in business/finance?

Discuss the key skills you have developed during your four years at the university in addition to the experiences you have had outside the classroom such as positions in clubs, organizations, etc.  Make sure to keep these experiences related to the industry.  Anything in a leadership position is usually a safe bet.

4. What has been your most rewarding accomplishment?

This is a great time to impress the interviewer with professional accomplishments.  Demonstrating success through use of quantitative data is usually the best way to go.  For example: During my time at Investment Bank X I was able to increase the rate of return by 10% for one of my private wealth client’s portfolios.

5.       Describe what you’ve accomplished toward reaching a recent goal for yourself.

Employers want to see that you are proactive.  Highlight a past experience in which you created a plan of action for yourself to achieve a goal.  Ex: Going back to school or taking a training course, forming a team, etc.

6. Tell me about a major problem you’ve had and how you handled it?

This is the part of the interview where the interviewer is looking for problem solving/conflict management skills.  Describe an instance in which you had to take an immediate plan of action to alleviate a situation.  Try to keep names out of the story such as former employers and companies, and don’t play the blame game.  This is also a way for the employer to see how you handle pressure.  Finance is a very stressful, high stakes industry and your manager needs to know that he/she can count on you to remain calm under a variety of situations.  Remember to mention the end result (using measurable data again is a great way to demonstrate progress/improvement)

7. What are Your Weaknesses?

Turn a negative into a positive. Pick out qualities that can be seen as both good and bad and no matter what, always give examples of how you are working to improve your behavior.

8. What is your desired salary?

Prior to the interview, conduct thorough research on the salaries of those in related positions with similar work experience.  While salaries will vary due to location, experience, size of firm, etc., having a relative range shows your employer you are prepared.

9.       Why did you decide to seek a position in this field?

Researches the company first so you have a good idea of what the firm offers its clients and employees, and then match those to your own personal goals and values.  Employers also want to see passion.  They don’t want to hire someone that just wants a job, so prove you’ve done your research on both the position you are applying for an the industry.

~Catherine B.

Please go to Quint for more information…

Prepackaged Bankruptcies – Part 1

Friday, November 13th, 2009

Charter Logo

In 1983, when Charter Company filed bankruptcy, the $1.8 billion conglomerate with more than 180 subsidiaries shocked the nation.  By hiding pending debt maturities in unconsolidated subsidiaries, Charter was able to fool investors until it was too late. Twenty-six years later, the Charter bankruptcy has been dwarfed by the bankruptcies and restructurings of financial conglomerates such as AIG, Lehman Brothers, and CIT.  CIT, with over $60 billion in financial assets was the latest victim of the financial crisis.  If the firm hadn’t waited until November to file, thousands of merchants would have not been able to finance their inventories before the 2009 holiday season.  CIT is the fifth largest company by assets to enter bankruptcy.  After agreeing to a prepacked bankruptcy process, investors will receive 70 cents on the dollar in the form of new senior debt and equity in the reorganized firm.  If the company has been allowed to fail like other financial institutions, unsecured claims would have received less than 10 cents on the dollar.

Fred Hodara of Akin Gump Strauss Hauer and Feld LLP recently interviewed with Bloomberg to comment on how prepacked bankruptcies pay off because working with management helps shape better solutions for creditor committees.

According to Moody’s Investor Services, the out of court restructuring recovery rate in bankruptcy for senior lenders may be as little as 35 cents on the dollar.  Corporate defaults have climbed to 239 this year, and the number is estimated to increase well into 2010.  The 12-month forecast for High Yield defaults is about 6.9%.   Usually, as default rates increase, recovery rates fall.  Prepacked bankruptcy negotiations with company management teams have been saving investors about 5% of their capital versus standard filings.   These cooperative negotiations are up more than 26x over the past two years, according to Moody’s.   A study by ratings agencies of prepacked bankruptcies from 1989 to 2009 shows a 54.6% recovery rate, versus a 49.6% recovery rate for standard bankruptcy procedures.

In prepacked bankruptcies, management teams work with lenders to set up plans before a company has the chance to file for Chapter 11.  The first prepackaged bankruptcy was probably that of Dallas based Republic Health Corp.  This form of negotiation became more popular in the 90s as a way to quickly recover on failed leveraged buyouts.

The major advantage of “prepacks” is that they save substantial time and disruption, versus a regular Ch. 11 bankruptcy filing.   In a prepacked bankruptcy, votes for a reorganization plan have already been solicited and agreed upon before Ch. 11, speeding up the process.  The average Ch. 11 case is rarely completed within a year and it can take up for three for a company to emerge from it.  The longer a case usually takes, the more the intrinsic value of a company deteriorates.

More updates on the prepacked bankruptcy process will follow…

Please see Bloomberg for full news update…

Please see Ohio Business Law for more information about bankruptcy…


Saturday, November 7th, 2009

We are happy to launch the Leverage Academy Forum.  Please visit this site for the latest news concerning buyouts, high yield and leveraged loan issuance, restructurings, and capital markets updates.