The Underwriting Process: How investment bankers convert assets into capital

The Recovering Investment Banker

00:56 - The underwriting process is one of the core functions of an investment bank.

02:22 - Example of the Joe Rogan podcast, which sold to Spotify for about $100M

07:14 - Capital markets are like an ocean of money. They are renewed, just like the water cycle. Underwriting process is like the rain that falls in the mountains, trickles down into rivers, and flows back into the ocean of the capital markets.

07:49 - The underwriting process is about the only place where an investment bank actually takes risk. Usually they put the risk on anyone else. But in the underwriting process, they're taking on substantial risk. If the market says your asset is worth less than they paid you for it, they lose money.

09:50 - The investment bank actually pays you for your asset, and then it's their asset. The risk becomes theirs.

13:24 - Crisis Deluxe is a fictional account of the Asian Financial Crisis in 1998. What actually happened in the real asian financial crisis was Peregrine Bank did an underwriting for a bond deal with an indoensian taxi company. Peregrine was on the hook for this commitment, and the indonesian Rupiah currency collapsed and Peregrine could not honor the commitment. So Peregrine went bankrupt, which triggered the asian financial crisis.

15:29 - A normal underwriting involves sub-underwriters that buy chunks of the investment. So the winning investment banks go to others and offer large slices of the deal to reduce their risk. Generally they'll get several sub-underwriters to de-risk a majority of the deal.

17:51 - Brokerage houses also get in on the action, buying large chunks of assets at wholesale price, then turning around and selling shares at retail price, pocket the difference (margin), and sell the assets to individual investors like you and me.

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