Transcript Transparencies to accompany A. Saunders' FI Management

Securities Firms and Investment Banks
Chapter 3
Financial Institutions Management, 3/e
By Anthony Saunders
Irwin/McGraw-Hill
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Securities Firms and Investment Banks

Nature of business:
• Underwrite securities
• Market making
• Advising (example: M&A, restructurings)

Growth in mergers and acquisitions:
• $200 billion in 1990. $919 billion 1997.
$910 billion in first half of 1998.
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Size, Structure and Composition
• Dramatic increase in number of firms from
1980 to 1987. Decline of 18% following the
1987 crash, to 1996.
• 1987: Salomon Brothers held $3.21 billion in
capital.
• 1997: Merrill Lynch held capital of $33 billion.
• Many recent inter-industry mergers (i.e.,
insurance companies and investment banks).
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Types and Relative Sizes of Firms
• National full-line firms are largest.
• National full-line firms specializing in
corporate finance are second in size.
• Remainder of industry:
» Specialized investment subsidiaries of BHCs.
» Discount brokers.
» Regional securities firms (subdivided into large,
medium and small).
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Key Activities
• Investing
• Investment banking
» Activities related to underwriting and distributing new
issues of debt and equity.
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Market making
Trading
Cash management
Assisting with mergers and acquisitions
Back-office and service functions
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Trends
• Decline in trading volume and brokerage
commissions (particularly since crash of 1987).
• Decline in underwriting activities over 1987-91.
• Resurgence in activity and profitability since
1991.
• 1987: Federal Reserve allowed BHCs to expand
securities underwriting. (Prohibited since 1933
under Glass-Steagall Act).
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Balance Sheet
• Key assets:
» Repurchase agreements.
» Long positions in securities and commodities.
• Key liabilities:
» Repurchase agreements major source of funds.
» Securities and commodities sold short.
• Capital levels much lower than levels in
depository institutions.
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Regulation

Primary regulator: SEC
• Reiterated by National Securities Markets
Improvement Act (NSMIA) of 1996.
• Prior to NSMIA, regulated by SEC and states.
Day-to-day trading practices regulated by
the NYSE and NASD.
 Securities Investors Protection Corporation
(SIPC).

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