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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. Securities Firms &Investment Banks.

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  • 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

Securities firms investment banks

Securities Firms &Investment Banks

  • Nature of business:

    • Underwrite securities.

    • Market making.

    • Advising (example: M&A, restructurings).

Securities firms investment banks1

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)

    • $525 billion 2003 ($535 trillion worldwide)

The largest m a transactions

The Largest M&A Transactions

Size structure and composition

Size, Structure and Composition

  • Dramatic increase in number of firms from 1980 to 1987. Decline of 31% following the 1987 crash, to year 2003.

  • 1987: Salomon Brothers held $3.21 billion in capital.

  • 2003: Merrill Lynch held capital of $24.8 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

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.

    • 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 2003

Top U.S.Underwriters, 2003

Key activities

Key Activities

  • Investing

  • Investment banking

    • Activities related to underwriting and distributing new issues of debt and equity.

  • Market making

    • Increasing importance of online trading

  • Trading

    • Position trading, pure arbitrage, risk arbitrage, program trading

Key activities continued

Key Activities (continued)

  • Cash management

  • Assisting with M&A

  • Back-office and service functions.



  • Decline in trading volume and brokerage commissions

    • particularly since crash of 1987, although some recovery since 1992. Record volumes 1995-2000.

  • Declines in market values--and commission income 2001-2002

  • Resurgence in market values and commissions 2003-2004.

Trends continued

Trends (continued)

  • 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 $22.5 billion.

  • Continuing concerns over conflicts of interest and other ethical concerns

    • Soft dollars

    • Analysts’ recommendations to buy or hold collapsing technology stocks

Balance sheet

Balance Sheet

  • Key assets:

    • Long positions in securities and commodities.

    • Reverse repurchase agreements.

  • Key liabilities:

    • Repurchase agreements major source of funds.

    • Securities and commodities sold short.

    • Broker call loans from banks

  • Capital levels much lower than levels in banks



  • 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



  • Early 2000s erosion of SEC dominance

    • 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

Regulation (continued)

  • 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

Investor Protection & Other Monitoring

  • Securities Investors Protection Corporation (SIPC).

    • 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

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

Global issues

Global Issues

  • Global nature of securities firms

    • Demonstrated by recent mergers such as Deutsche Bank/Bankers Trust

    • Dominance of UBS in U.S. mortgage backed securities markets

  • Growth in securities trading and underwriting is a global event

Pertinent websites

Pertinent Websites

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.tfibcm.com

Wall Street Journal www.wsj.com

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