Investment banks have long played a part in the financial system. But the recent crisis over securities based on risky home loans has brought them new attention.
Investment banks handle stocks, bonds and other securities. They underwrite new offerings. That means they take the risk of buying the securities and reselling them to the public. They also provide business advice and market research, and deal in existing securities.
Investment bankers have structured some newer securities in highly complex ways. Their value could be tied to lists of stocks or prices of goods or, as the world now knows, groups of risky home loans.
These mortgage-backed securities were sold to investors worldwide as a way to spread the risk. But as more and more loans went bad, the market collapsed.
Before the nineteen thirties, the United States had no separation between traditional banking and investment banking activities. Bank holding companies could own other financial companies that would underwrite new stocks. They would also provide stockbroker services for the public. People often bought shares with money borrowed from the banks.
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