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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

Securities Firms and Investment Banks Chapter 3

Financial Institutions Management, 3/e

By Anthony Saunders

securities firms and investment banks
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.
size structure and composition
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).
types and relative sizes of firms
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).
key activities
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
trends
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).
balance sheet
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.
regulation
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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