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Back to blog October 28, 2009 No Comments Author: Andy Jones

Investment Banks – after the Crisis

Bulge-bracket is a term used in corporate finance to describe the largest and often most prestigious investment banks. Although there is no strict metric for this classification, bulge-bracket investment banks typically represent clients with transaction values in excess of $50 million.

[NOTE: segregates investment banking firms by the enterprise value of the firms’ typical clients.]

Prior to the 2007-2008 sub prime mortgage crisis, bulge-bracket firms dominated Wall Street. However, many of the largest investment banks were highly leveraged, having borrowed sums of money that were too large relative to their cash or equity capital. This borrowing essentially leverages (amplifies) a firm’s returns (up or down), making the firms particularly vulnerable to market movements. The sub prime crisis therefore had far reaching effects and served as a cleansing of sorts for the financial markets. As the value of mortgage-backed securities in the investment banks’ leveraged portfolios declined, so did the banks’ solvency, which begs the questions: What happened to the Bulge Bracket firms and where are they now?

During the sub prime mortgage crisis, major financial institutions failed, merged or were bailed out by governments. Here’s what happened to the five largest U.S. investment banks (not in order of size):

  • Lehman Brothers: went bankrupt
  • Bear Stearns: taken over by JPMorgan Chase
  • Merrill Lynch: taken over by Bank of America
  • Goldman Sachs: received bail-out funds by the U.S. government
  • Morgan Stanley: received bail-out funds by the U.S. government