Securities Firms and Investment Banks Chapter 3

1
Securities Firms and Investment Banks
Chapter 3

• Financial Institutions Management, 3/e
• By Anthony Saunders

2
Securities Firms and Investment Banks

• Nature of business
• Underwrite securities
• Market making
• Advising (example MA, restructurings)
• Growth in mergers and acquisitions
• 200 billion in 1990. 919 billion 1997. 910
  billion in first half of 1998.

3
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).

4
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).

5
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

6
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).

7
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.

8
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).