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1、21-1,The Investment Banking Industry I. A Brief Historical Perspective Prior to the 1930s, securities underwriting and distribution were performed by both investment and commercial banks. The Great Depression brought allegations that banks had underwritten new securities in order to raise funds whic
2、h were then paid to them. This was viewed as defrauding the investor in order to shore up the banks financial position. The government attempted to rectify this perceived conflict of interest with: The Banking Act of 1933 (Glass-Steagall) The Securities Act of 1933 The Securities Exchange Act of 193
3、4 More recently, it is thought that perhaps these acts may have been overkill.,21-2,II. The Investment Banking Function A. Advising Function The investment bank first assesses the clients funding needs. It will then suggest a funding mechanism and structure. B. Administration Function Given a financ
4、ing strategy, an investment bank then takes on the myriad of details associated with a new issue. Administration can range from the tedium of record keeping to navigation through the morass of regulation. C. Underwriting Function An investment firm undertakes the underwriting function when it agrees
5、 to bring an issue to market. Proper setting of the guaranteed price is difficult and is often delayed until the end of the registration period. Over or underpricing of a security flotation not only can hurt an underwriters profitability, it can diminish its reputation.,21-3,The underwriter likes th
6、e offering to sellout quickly at a price slightly above the guaranteed price. In this way, profits and goodwill are maintained. The investment bank may choose not to be the underwriter. The clients offering is then said to be distributed on a best-efforts-basis. D. Distribution Function A good inves
7、tment bank is able to share its risk by the addition of other banks to the underwriting syndicate. The underwriter is able to further reduce its risk by the establishment of a good selling group. Syndicate members are expected to incur the further risk of stabilizing the offerings price during initi
8、al stages.,21-4,III. Investment Banking Structure A. Boutique vs. Full-Service Banks Firms that limit their activity to a small portion of the securities industry are said to be a boutique. Limitation may range from restriction to underwriting to further specialization in a small subset of the marke
9、t. Limitation can lead to greater expertise but lessened diversification. To improve diversification, other firms have levered their expertise into activities such as: mergers and acquisitions, asset management, security sales and trading, and merchant banking. But diversification can lead to confli
10、cts of interest between differing areas. Investment banks sometimes segment their business into divisions to address these potential conflicts. These are called Chinese Walls.,21-5,B. Investment Management Activity Private client investment management . Wholesale fund management. Mutual fund investm
11、ent management. C. Mergers, Acquisitions, and Other Activities Corporate restructuring. Facilitation of acquisition or defensive measures. D. Full Service: Good or Bad? Niche players versus full-service firms. E. The Major Players The largest full-line firms in the U.S. include: Merrill Lynch, Goldm
12、an Sachs, Salomon Smith Barney, Morgan Stanley Dean Witter, and Credit Suisse-First Boston. Insert 21.1, 21.2, & 21.3,21-6,There are also specialized investment bank subsidiaries such as J.P. Morgan, Chase Manhattan, discount brokers, and regional securities firms. The banks that underwrite the bulk
13、 of U.S. corporate securities are collectively known as the “bulge bracket” firms. Exhibits provide various rankings for the underwriting market. Numerous sources also rank firms in various subcategories. Rankings vary by category and over time. Insert 21.4, 21.5, 21.6, & 21.7 F. The Cyclicality Nat
14、ure of Profits There are many cycles that affect the profitability of financial corporations: interest rates, exchange rates, commodity prices, and equity prices. During high points of the cycle, profits can be astronomical as can losses during low points. Many firms have reduced this cyclicality by
15、 diversifying. An additional survival method has been increased capital.,21-7,IV. Regulation of Investment Banking Regulatory aims: 1) promote competition 2) disseminate information 3) prevent the misuse of insider information 4) reduce incidence of insolvency. A. Major Regulatory Legislation Securi
16、ties Act of 1933 Securities and Exchange Act of 1934 Banking Act of 1933 Securities Acts Amendments Government Securities Act B. Role of the SEC The SEC oversees the issuance of new securities and mandates their disclosure rules. It also regulates all organized exchanges, participating brokers, and their capital requirements.,21-8,C. Role of the NASD The National Association of Securities Dealers (NASD) is an association of dealers that self regulates with the goal of trading efficiency and
