Saunders Cornett Chapter 4
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Transcript Saunders Cornett Chapter 4
Chapter 4
Securities Firms
and Investment
Banks
McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Overview
In this segment ... Securities Firms and
Investment Banks:
Activities of securities firms and investment
banks
Size, structure and composition
Balance sheets and recent trends
Regulation of securities firms and investment
banks
Global issues
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Securities Firms &Investment Banks
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Nature of business:
Underwrite securities.
Market making.
Advising (example: M&A, restructurings).
Securities Firms &Investment Banks
Growth in domestic M&A:
Less than $200 billion in 1990.
$1.83 trillion in 2000
In US: bottomed out at $458 billion in 2002
($1.2 trillion worldwide)
$1.3 trillion 2006 ($2.9 trillion worldwide)
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Mergers and acquisitions 1990-2006
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The Largest M&A Transactions
Deal
Price (billions) Year
Citicorp/Travelers
$83.0
1998
BOA/Fleet Boston
49.3
2003
J.P. Morgan/Bank One
60.0
2004
Chase/J.P. Morgan
35.0
2000
BOA/MBNA
35.0
2005
Wachovia/Golden West
25.5
2006
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Size, Structure and Composition
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Dramatic increase in number of firms from 1980 to
1987. Decline of 37% following the 1987 crash, to
year 2006.
1987: Salomon Brothers held $3.21 billion in
capital.
2006: Merrill Lynch held capital of $35.5 billion.
Many recent inter-industry mergers (i.e., insurance
companies and investment banks).
Role of Financial Services Modernization Act, 1999
Types and Relative Sizes of Firms
National full-line firms are largest.
Merrill Lynch, Morgan Stanley
National full-line firms specializing in corporate
finance are second in size.
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Goldman Sachs, Salomon Brothers/Smith Barney
Remainder of industry:
Specialized investment subsidiaries of BHCs.
Discount brokers.
Regional securities firms (subdivided into large, medium
and small).
Specialized electronic trading securities firms
Top U.S.Underwriters, 2006
Manager
Market Share
SSB
Amount
(Billions)
$668.8
J.P. Morgan
506.1
6.6
Deutsche Bank
475.0
6.2
Morgan Stanley
454.6
6.0
Lehman Bros.
446.5
5.8
8.7%
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Key Activities
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Investing
Investment banking
Activities related to underwriting and
distributing new issues of debt and equity.
Market making
Increasing importance of online trading
Technology risk
Decimalization
Trading
Position trading, pure arbitrage, risk arbitrage,
program trading
Key Activities (continued)
Cash
management
Assisting with M&A
Back-office and service functions.
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Trends
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Decline in trading volume and brokerage
commissions
particularly since crash of 1987, although some
recovery since 1992. Record volumes 19952000.
Declines in market values--and commission
income 2001-2002
Resurgence in market values and
commissions during mid-2000s.
Trends (continued)
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Pretax net income over $9 billion per year
1997-2000
Pretax profits soared to $21.0 billion in 2000
curtailed by economic slowdown and
September 11 attacks 2001.
2003 record pre-tax profits of $24.1 billion.
Continuing worries over investor confidence
Balance Sheet
Key assets:
Long positions in securities and commodities.
Reverse repurchase agreements.
Key liabilities:
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Repurchase agreements major source of funds.
Securities and commodities sold short.
Broker call loans from banks
Capital levels much lower than levels in
banks
Regulation
Primary regulator: SEC
Reiterated by National Securities Markets
Improvement Act (NSMIA) of 1996.
Prior to NSMIA, regulated by SEC and states.
Regulate trading activities such as shelf
registration
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Regulation
Early 2000s erosion of SEC dominance
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Increased vigilance by State Attorneys General
Spring 2003, $1.4 billion in penalties over
investor abuses.
Sarbanes-Oxley Act of 2002
Independent auditing oversight board under
SEC
Instigated by Enron, Global Crossings, Tyco,
WorldCom
Regulation (continued)
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Day-to-day regulation: NYSE, NASD
October 2003 implementation of provisions
of Patriot Act to combat money laundering
Scrutiny of individual identities and affiliations
with terrorists
Investor Protection & Other Monitoring
Securities Investors Protection Corporation
(SIPC).
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Protection level of $500,000
Federal Reserve also has role in overseeing
securities firms and investment banks
Vulnerability of the financial system
Issue of timely settlement raised by Greenspan
Web Resources
For details of regulation of securities firms
and investment banks, visit:
SEC: www.sec.gov
NYSE: www.nyse.com
NASD: www.nasd.com
SIPC: www.sipc.org
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Global Issues
Global nature of securities firms
Demonstrated by recent mergers such as
Deutsche Bank/Bankers Trust
Dominance of Royal Bank of Scotland in U.S.
mortgage backed securities markets
Growth in securities trading and
underwriting is a global event
US accounting standards issues
Depreciation of the dollar against the yen
and the euro
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Pertinent Websites
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Federal Reserve: www.federalreserve.gov
NASD: www.nasd.com
NYSE: www.nyse.com
SEC: www.sec.gov
Securities Industry Association: www.sia.com
SIPC: www.sipc.org
The Banker: www.thebanker.com
Thompson Fin. Securities Data: www.thomson.com
Wall Street Journal www.wsj.com