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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 l.jpg

Securities Firms and Investment Banks Chapter 3

Financial Institutions Management, 3/e

By Anthony Saunders


Securities firms and investment banks l.jpg
Securities Firms and Investment Banks Chapter 3

  • 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.


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Size, Structure and Composition Chapter 3

  • 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).


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Types and Relative Sizes of Firms Chapter 3

  • 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).


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Key Activities Chapter 3

  • 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


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Trends Chapter 3

  • 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).


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Balance Sheet Chapter 3

  • 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.


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Regulation Chapter 3

  • 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).