If we lived in a non-Coasian world we would probably accept with no trouble some very recent apocalyptic prophecies about the future of investment banking. As a consequence of the current financial meltdown, in fact, some authoritative columnists and observers have maintained the next end of investment banking, as if this financial industry were solely responsible for both instability and crisis. Yet, as we live in a Coasian world of market imperfections and asymmetries, incomplete contracts and so on, it would not be surprising if investment banking were to survive even this global crisis. These assumptions are the basis of this two-century history of investment banking and, above all, the theory of investment banking offered by the authors, one which is consistent with the Coase theorem. In fact, according to their view, investment banks sit ‘at the nexus of an informal information marketplace for price-relevant information’ (p. 72), such as the creditworthiness of the issuer, as well as the potential demand for specific equity or bond issues. This institutional approach to investment banks as agents able to price information and create and enforce extra-legal contracts on price-relevant information through incentives and sanctions underpins the analytical framework of the book. However, as they are part of a ‘nexus’, investment bankers and banks are one of the actors on the scene, the others being central authorities, law-makers and markets. This institutional theory assumes that imperfect markets and incomplete contracts need a specific institution able to cope effectively with agency problems stemming from free-riding temptations. The approach suggests that investment banking could be explained by working within a complex network from which bankers and banks should be able to extract information and signal information on investors and borrowers, essentially for their reputational and informational advantage. The relevance of trust and reputation is stressed from the very beginning of investment banking in the second half of the eighteenth century as an evolution of merchant banking. Before the financial revolution of the last few decades, which has rapidly transformed the sector essentially into a capital-intensive one, indeed, investment banking relied heavily upon reputational capital accumulated inside the network through which transaction costs and risks were effectively reduced and managed.

After presenting and discussing the theoretical framework, the focus of the book shifts to the evolutionary process of this financial sub-sector, from the rise of investment banking in Europe in the eighteenth century to its ‘Americanisation’ during the ensuing laissez-faire age, when the size of capital demand and investments in capital-intensive sectors pushed investment banks towards a concentration process. Changes in the industry structure largely depended on the evolution of legal contracts, financial markets and communication technologies. Within a few decades, deep changes in transatlantic trade financing, led by technological advances in communications and organisational innovations in steam shipping, reoriented American investment bankers towards industry and state financing. The ‘railroadisation’ allowed J. P. Morgan to became a leading house in the late nineteenth century thanks to their capabilities in managing successfully syndicated operations, entering the retail market and in reorganising corporate structures. The investment bankers' activism became more rampant in those decades, during which two main components can clearly be identified on the US scene: the German-Jewish network (Seligmans, Kuhn Loeb & Co, Lehman Brothers and Goldman Sachs) and the Yankee network (Kidder Peabody, Drexel, Lee & Higginson, Morgan). At this time, the evolution of investment banking in the US largely rested on selective crises, demand variations and political responses to changes in both the organisation and influence of investment bankers. From the second half of the nineteenth century onwards, the history of investment banking is implicitly assumed to be an American feature, though London still played a significant role as a sort of natural counterpart, not to say an extension, for US investment bankers who needed to issue and market on the other side of the ocean. Major European, but essentially British, investment bankers, like the Rothschilds, for instance, are considered less innovative and dynamic, not able to benefit from the opportunity offered by the fast-growing American financial market. In particular, from World War I, investment banking is regarded as a uniquely American affair. Securities issuance and advisory activities, typically available to corporations for M&A, are dealt with only in the context of the US market; the book therefore largely neglects the importance of some specialties developed in the interwar period by European bankers such as Lazard and Siegfried Warburg in advisory and underwriting activities. Consequently, the Glass-Steagall Act in 1933 is rightly considered the real watershed in investment banking, and the merger movement of the 1960s largely depended on the idiosyncratic approach of bankers like the French refugee André Mayer. In fact, the book tends to undervalue the international nature of investment banking even when it was heavily constrained by segmentation and financial repression by governments and central authorities all around the world. Thus, the ascent of M&A advisory activities from about 1975 onwards is mainly assumed to be a demand-driven phenomenon, in which investment bankers played essentially a secondary role as innovators. The peculiar focus on the American scene, consequently, may also explain the tendency to assume that financial globalisation is a US-centred process.

Nevertheless, this book provides an interesting and a meaningful perspective on the evolution of an important financial sector. Rather convincingly, major changes in investment banking – business and organisation, human capital and skills, practices and ownership – occurred as a result of adjustment to major changes in demand, law-making, markets and technologies. It is not easy to find novel evidence on investment banking based on archives or original records, but, even though some important titles are neglected (such as those by David Kynaston on the London Stock Exchange or Youssef Cassis on international financial centres), this is certainly a very stimulating and insightful treatment of the topic.