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Securities Firms and Investment Banks Chapter 3

Securities Firms and Investment Banks Chapter 3. Financial Institutions Management, 3/e By Anthony Saunders. Securities Firms and Investment Banks. Nature of business: Underwrite securities Market making Advising (example: M&A, restructurings)

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Securities Firms and Investment Banks Chapter 3

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  1. Securities Firms and Investment Banks Chapter 3 Financial Institutions Management, 3/e By Anthony Saunders

  2. 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.

  3. 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).

  4. 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).

  5. Key Activities • Investing • Investment banking • Activities related to underwriting and distributing new issues of debt and equity. • Market making • Trading • Cash management • Assisting with mergers and acquisitions • Back-office and service functions

  6. 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).

  7. 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.

  8. 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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