overview
DESCRIPTION
Overview. This chapter discusses securities brokerage 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. - PowerPoint PPT PresentationTRANSCRIPT
CHAPTER 4Financial Services: Securities Brokerage and Investment Banking
Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.McGraw-Hill/Irwin
4-2
Overview
This chapter discusses securities brokerage 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
4-3
Securities Firms & Investment Banks
Nature of business– Underwrite securities– Market making– Advising (example: M&A, restructurings)
4-4
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)– Topped $1.7 trillion 2007 ($4.5 trillion
worldwide)– Effects of financial crisis: fell to $808 billion in
2009 ($1.7 trillion worldwide)Worst financial crisis since 1930s, but M&A activity
still greater than early 2000s
4-5
Mergers and Acquisitions, 1990-2009
4-6
Structural Changes in Recent Years
Acquisition of Bear Stearns by J.P. Morgan Chase
Bankruptcy of Lehman Brothers Acquisition of Merrill Lynch by Bank of
America Only two remaining major firms:
– Goldman Sachs and Morgan StanleyConverted to commercial bank holding
companies in 2008
4-7
Largest M&A Transactions
4-8
Size, Structure & Composition
Dramatic increase in number of firms from 1980 to 1987; Decline of 37% following the 1987 crash, to year 2006
1987: Salomon Brothers held $3.21 billion in capital
2006: Merrill Lynch held capital of $35.5 billion
4-9
Size, Structure & Composition
Many recent inter-industry mergers (i.e., insurance companies and investment banks)– Role of Financial Services Modernization Act,
1999
Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley gone by end of 2008
4-10
Types & Relative Sizes of Firms
National full-line firms are largest– BOA (via acquisition of Merrill Lynch) Morgan
Stanley
National full-line firms specializing in corporate finance are second in size– Goldman Sachs, Salomon Brothers/Smith
Barney (Citigroup)
4-11
Remainder of industry:– Large investment banks (Lazard Ltd. And
Greenhill & Co.)– Regional securities firms (subdivided into large,
medium and small)– Specialized discount brokers, electronic trading
firms, venture capital firms, and other firms
Types & Relative Sizes of Firms
4-12
Top Bank Holding Companies 2009 (by brokerage fee income)
4-13
Key Activities Investing Investment banking
– Activities related to underwriting and distributing new (IPOs) and secondary (seasoned) issues of debt and equityPublic offerings & private placements
Market making– Increasing importance of online trading
Technology risk
– Decimalization
4-14
Activities (continued)
Trading– Position trading, pure arbitrage,
risk arbitrage, program trading
Cash management Assisting with M&A Back-office and service
functions
4-15
Recent 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 during mid-2000s
New lows in 2008
4-16
Trends (continued) Pretax net income over $9 billion per
year 1996-2000 Pretax profits soared to $21.0 billion in
2000– Curtailed by economic slowdown and
September 11 attacks 2001 Worries over securities law violations
and investor confidence Financial crisis, 2008 Profits recovered, 2009
4-17
Securities Industry Pretax Profits, 1990-2009
4-18
Balance Sheet Key assets:
– Long positions in securities and commodities– Reverse repurchase agreements– Implications: Market, interest rate & F/X risks
Key liabilities:– Repurchase agreements major source of
funds– Securities and commodities sold short– Broker call loans from banks
Capital levels much lower than in banks
4-19
Regulation
Primary regulator: SEC – Reiterated by National Securities Markets
Improvement Act (NSMIA) of 1996– Prior to NSMIA, regulated by SEC and
states
4-20
Regulation
Early 2000s erosion of SEC dominance – Increased vigilance by State Attorneys
GeneralCriminal cases brought mainly by states against
securities law violators∙ New York State vs. Merrill Lynch
Spring 2003, $1.4 billion in penalties over investor abuses
New rules brought by SEC for greater disclosure by analysts of potential conflicts of interest
4-21
Regulation (continued)
Sarbanes-Oxley Act of 2002– Independent auditing oversight board
under SEC– Instigated by Enron, Global Crossings,
Tyco, WorldCom
4-22
Regulation (continued)
SEC sets regulatory standards– Day-to-day regulation: Financial Industry
Regulatory Authority (FINRA)Example: Floor trader at Fleet specialist
fined $25,000 for mishandling customer orders (10,000 shares of GM sold from Fleet’s account on rumors of problems at GM)
4-23
Extension of Oversight
Additional oversight from US Congress– Hearings focused on role of investment
banks in the financial crisisGoldman Sachs bundling of toxic assets
4-24
Extension of Oversight
2010 Financial Services Regulatory Overhaul Bill – Financial Services Oversight Council– New authority for Federal Reserve to
oversee payment, clearing, and settlement systems
Executive compensation in the financial crisis culminated in “pay czar” (Feinberg)
4-25
Investor Protection & Other Monitoring
Securities Investors Protection Corporation (SIPC)– Protection level of $500,000
October 2003 implementation of provisions of Patriot Act to combat money laundering– Scrutiny of individual identities and
affiliations with terrorists
4-26
Web Resources
For details of regulation of securities firms and investment banks, visit:SEC www.sec.govNYSE www.nyse.comNASD www.nasd.comSIPC www.sipc.org
4-27
Global Issues Global nature of securities firms
– Competition between US and European firms
– Foreign investors’ transactions in US securities and US investors’ transactions in foreign securities exchanges increased
– Global concern about capital, liquidity and leverage following the financial crisis Implications for global competitiveness
∙ Strategic alliances∙ Exits from foreign markets
4-28
Pertinent Websites
Federal ReserveNASDNYSESECSecurities Industry
AssociationSIPC
www.federalreserve.govwww.nasd.comwww.nyse.comwww.sec.govwww.sia.com
www.sipc.org