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Overview

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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Overview

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  1. 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

  2. Securities Firms &Investment Banks • Nature of business: • Underwrite securities. • Market making. • Advising (example: M&A, restructurings).

  3. 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)

  4. The Largest M&A Transactions

  5. 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

  6. 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

  7. Top U.S.Underwriters, 2003

  8. 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

  9. Key Activities (continued) • Cash management • Assisting with M&A • Back-office and service functions.

  10. Trends • 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.

  11. 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

  12. 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

  13. Regulation • 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

  14. Regulation • 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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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