Although it is a called a bank, Lehman Brothers had less in common with your local high street lender than Manchester United does with a knock-around game of football on a Sunday afternoon. And it’s not just the salaries.

Your high street bank “borrows” money from savers and lends to people who want to buy a house, or companies who want to build a factory.

Investment banks such as Lehman Brothers try to lend as little money as possible, at least for any length of time. Their main business is acting as middlemen. They help companies to raise money from investors (taking a cut) or exchange their pounds for dollars (taking a cut) or insure themselves against a rise in the oil price (taking a cut).

They have grown very rapidly in recent years, partly by taking away business that would traditionally have been done by ordinary banks or insurance companies.

In the mortgage market for example, they crunched together loans made by banks into packages in a process called securitisation. The banks liked this because it enabled them to go off and make more loans and more fees. The packages were sold by the likes of Lehman to investors such as pension funds or insurance companies.

Except they did not sell them all. Lehman, UBS, Citigroup, Bear Stearns and Merrill Lynch were all holding huge quantities of these mortgage packages when the music stopped with the credit crunch. Nobody wanted to buy them, the value plummeted and the banks took losses of billions of dollars.

Some of the investment banks have made big losses buying and selling investments with their own money – so-called proprietary trading.

The bulk of the problem has been the mortgages and other loans that they held on to.

The snag was that they are not set up like ordinary banks. They are much more lightly regulated and have a much smaller cushion of capital. At Lehman, the losses quickly burned through the capital and its share price collapsed, preventing it raising more capital from shareholders.

Of the five independent Wall Street investment banks, two have now collapsed – Lehman and Bear Stearns – and a third, Merrill Lynch, has been bought by Bank of America. This raises the question of whether the species is doomed.

The survivors – Goldman Sachs and Morgan Stanley – will now have to convince investors that they have an independent future or sell themselves too. Both are announcing figures this week and the market reaction will be critical.

Even if all five banks were to disappear it would not mean the end of investment banking. Most of this is already carried out within bigger financial groups such as Citigroup, JPMorgan Chase, Bank of America, Deutsche Bank, Barclays and HSBC.

These all own traditional banks with huge retail deposits, which makes them much more stable and capable of withstanding big losses.

The nature of investment banking will undoubtedly change. Some of the businesses that contributed to the recent boom may never return. And the rest will probably be less profitable, partly because regulators will demand that banks be more conservative.

That in turn will mean lower pay but maybe not dramatically. Not Manchester United level perhaps, but still Newcastle rather than Grimsby Town.

Telling differences

Retail or high street bank

— High street branches
— Current and deposit accounts
— Mortgages
— Personal and commercial loans to small businesses
— Small business advisory service

Investment or merchant bank

— Deals with companies rather than general public
— Underwrites, or arranges, the sale, of stock, bonds and other financial instruments
— Advises on mergers, acquisitions, flotations and other corporate restructuring
— Large corporate loans
— Foreign exchange trading
— General corporate advice
— Stockbroking – buying, selling and analysing shares for corporate clients

But . . .
the blurring of the boundaries in recent years means that many of the biggest high street banks have investment banking arms, while many investment banks have divisions that advise super-rich individuals on ways of investing their wealth

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