How do investment bankers make billions?
Years ago I was briefly a flunky/assistant to the big cheese at Goldman Sachs. As he was the senior partner of this investment banker, I asked him just about the same question. He answered me with an example.
Suppose Ford Motor Company wants to build a huge new factory. They need a cool billion dollars to do it. They come to me as their investment banker and ask me to raise the money. We have a list of wealthy people who will invest their money in whatever good deals we suggest. So I put together a package deal of a new issue of Ford Stock that is expected to pay a 5% dividend, plus a bond that will pay 6% interest, plus a convertible bond that if things go as well as we hope they will, will yield 100% in 2 years. For putting together the package and getting the cash (for Ford) from the investors, my firm gets $50 million in the form of stocks, bonds, convertibles and a bit of cash to cover our expenses. With my help, as an active director of Ford, I show them how to produce a few new designs: The Mustang car and a Surfer Van that in the following years broke all prior sales records. Ford did well. Our $50 million in securities went way up in value. We sold half for $100 million. We kept the other half as a long-term hold.
We make deals like this twice a week. And that is how we make our billions. And then he went on to tell me about arbitrage–but that’s another tale for another answer.
After I learned many lessons from the Goldman guy and many more from another real estate tycoon I worked for, it was pretty easy to make my own deals . And so it came to pass that I made my own modest little pile so that I could retire (and go back to school) at the age of 23. Then I became an actor, detective, a publisher, an author, and a few other things.
I’m now 80. Life as an entrepreneur has been good to me (aside from those 5 disastrous divorces).