Each financial institution has its own structure which can vary according to size, profitability, geographical location, and so on, however, we could try to sketch a skeleton structure that describes the average investment bank. Let us remind ourselves that our goal is to locate the treasury within an institution and therefore what matters to us particularly is the interaction between the treasury desk and the other parts of the bank. This is important because, as we will try to prove throughout this book, one cannot judge the value attached to a financial instrument without considering where the liquidity financing it comes from.

Private and Public Sides

The first crucial distinction is between a private, client-facing side and a public, market-facing side. The distinction is important under a legal point of view in the sense that the former deals with private and confidential information that the latter deals with information which is open to the general public. The two are separated by internal controls (the famed Chinese walls).

On the private side of an institution are all those units dealing with products tailor-made to suit the needs of a specific client. These could be mergers and acquisitions, flotations of companies including underwriting (the promise to buy a certain amount of issued assets); it could be leveraged buyouts in which a client company is helped to raise (a significant amount of) debt in order to acquire another company. It could also be lending, a topic close to our scope; lending might lead to loan syndication, which consists of taking a loan and parceling it out to other financial institutions. All these activities hinge on confidentiality since they rely on very sensitive information, information that should not be disclosed either to the general public or, even more crucially, to the rest of the institution. The profit generated by the private side of a bank is made of fees, either up front as in the case of advisory roles or in terms of spreads over some reference rate in the case of loans. The liquidity needed for these types of activities (for example, to underwrite a stock issuance) is usually greater than the profits generated, meaning that it must come from the public side of the bank.

On the public side there is what is sometimes described as the capital markets division, which is made up of the sales and trading desks. Information on this side is not confidential; it is public and open for everyone (with access to a broker's screen) to see. One could argue that it is in everyone's interest that the information is as open as possible: the liquidity we have praised in the previous sections is directly proportional to an open access to information. Since our focus is, at least as far as the valuation of financial instruments is concerned, on activities carried out on the public side of a financial institutions, we shall describe them in greater detail.

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