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1、Lecture 15: Investment Banking and Secondary MarketsGlass-Steagall Act 1933 The modern concept of “Investment Bank” was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. Carter Glass, Senator from Virginia,
2、believed that commercial banks securities operations had contributed to the crash of 1929, that banks failed because of their securities operations, and that commercial banks used their knowledge as lenders to do insider trading of securities.Investment Banks Bulge bracket firms: First Boston, Goldm
3、an Sachs, Merrill Lynch, Morgan Stanley, Salomon Brothers, Lehman Brothers. Traditionally were often partnerships, but partnership form is disappearing.Controversy over Glass Steagall Prof. George Benston showed that unregulated banks have lower failure rate. Other countries (Germany, Switzerland) h
4、ave always allowed universal banking In 1990s, regulators nibbled away at Glass Steagall by allowing commercial banks to engage in certain securities operationsGraham-Leach Act 1999 President Clinton November 1999 signs Graham-Leach Bill which rescinded the Glass-Steagall Act of 1933. Consumer group
5、s fought repeal of Glass- Steagall saying it would reduce privacy. Graham-Leach calls for a study of the issues of financial privacyMergers among Commercial Banks, Investment Banks & Insurance Companies Travelers Group (insurance) and Citicorp (commercial bank) 1998 to produce Citigroup, on anticipa
6、tion that Glass-Steagall would be rescinded. Brokerage Smith Barney Chase Manhattan Bank (commercial bank) acquires JP Morgan (investment bank) (2000) for $34.5 billion UBS Switzerland buys Paine Webber (brokerage) 2000 Credit Suisse buys Donaldson Lufkin Jenrette (investment bank) 2000Underwriting
7、of Securities Issuance of shares and corporate debt Seasoned issue versus IPO Underwriter provides advice for issuer, distribution of securities, sharing of risks of issue, and stabilization of aftermarket. Underwriter also “certifies” the issue by putting its reputation behind the issue.Moral Hazar
8、d Problem Mitigated by Investment Banks Firms have incentive to issue shares when they know their earnings are only temporarily high. This problem can be “solved” by resorting to bank loans instead of new equity Problem can also be solved by issuing security with an investment bank that has a reputa
9、tion to protect. Studies show that investment banks that repeatedly underprice or overprice issues suffer a market share loss afterwards.Two Basic Kinds of Offerings Bought deal (synonym: Firm commitment offering): The underwriter agrees to buy all shares that are not sold Best efforts: the underwri
10、ter says that if the issue is not sold, deal collapses.The Underwriting Process I Prefiling period Advise issuers about their choices Agreement among underwriters, designates manager, fees Filing of registration statement with SEC, begins cooling-off period Cooling off period distribute preliminary
11、prospectus (red herring), nothing elseThe Underwriting Process II Call prospective clients for indication of interest Due diligence meeting between underwriter and corporation Decide on offering price, underwriting agreement, which underwriter sells what Dealer agreement, dealers purchase from under
12、writers at a discount from public price Effective date Support the price in the aftermarketStabilization A form of market manipulation by the underwriter near the time of the issue that is permitted by the SEC Underwriting syndicate legally allowed to conspire to “fix” prices in market until entire
13、issue is sold outFrom a 1929 Textbook on Investment Banking“In floating any new issues of securities, therefore, the seller desires to have conditions so shaped that the price of the issue will remain stable, or perhaps it will rise slightly, during the period in which the securities are being absor
14、bed by the market. . .establishing a favorable psychological attitude of investors. . The term manipulated market is not altogether a misnomer.”The Tombstone Newspaper announcements of securities issues, listing underwriting syndicate Why called tombstones? Origin of term forgotten. Resemblance? The
15、 only kind of ad allowed during cooling-off period Cross between birth announcement and obituary. Tombstones appear after the securities have already been sold, but of course they are now on the market. Investment bankers love to read themVariations on the Usual Underwriting Process Auction Process
16、(competitive bidding underwriting) various syndicates bid on the issue Preemptive rights offering: existing shareholders have rights to buy issue below market value Directly Public Offering (DPO): Company itself sells its securities directly to public, usually over the web. Small firms. Example: Internet Ventures, a web service provider, raised
