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Overview   <ul><li>In this segment ... Securities Firms and Investment Banks: </li></ul><ul><ul><li>Activities of securiti...
Securities Firms &Investment Banks <ul><li>Nature of business: </li></ul><ul><ul><li>Underwrite securities. </li></ul></ul...
Securities Firms &Investment Banks <ul><li>Growth in domestic M&A: </li></ul><ul><ul><li>Less than $200 billion in 1990.  ...
Mergers and acquisitions 1990-2006 2007 1.9 2008 1.3 6Mo 2009  http://www.thomsonreuters.com/business_units/financial/leag...
The Largest M&A Transactions
Size, Structure and Composition <ul><li>Dramatic increase in number of firms from 1980 to 1987. Decline of 37% following t...
Types and Relative Sizes of Firms <ul><li>National full-line firms are largest. </li></ul><ul><ul><li>Merrill Lynch, Morga...
Top U.S.Underwriters, 2006
Key Activities <ul><li>Investing </li></ul><ul><li>Investment banking </li></ul><ul><ul><li>Activities related to underwri...
 
Key Activities (continued) <ul><li>Cash management </li></ul><ul><li>Assisting with M&A </li></ul><ul><li>Back-office and ...
Trends <ul><li>Decline in trading volume and brokerage commissions  </li></ul><ul><ul><li>particularly since crash of 1987...
Securities Firms Commission Income
Trends (continued) <ul><li>Pretax net income over $9 billion per year 1997-2000 </li></ul><ul><li>Pretax profits soared to...
Balance Sheet <ul><li>Key assets: </li></ul><ul><ul><li>Long positions in securities and commodities. </li></ul></ul><ul><...
 
Regulation <ul><li>Primary regulator: SEC  </li></ul><ul><ul><li>Reiterated by National Securities Markets Improvement Act...
Regulation <ul><li>Early 2000s erosion of SEC dominance  </li></ul><ul><ul><li>Increased vigilance by State Attorneys Gene...
Regulation (continued) <ul><li>Day-to-day regulation: NYSE, NASD </li></ul><ul><li>October 2003 implementation of provisio...
Investor Protection & Other Monitoring <ul><li>Securities Investors Protection Corporation (SIPC). </li></ul><ul><ul><li>P...
Stanford CD Fraud
Madoff Hedge Fund Fraud
Web Resources <ul><li>For details of regulation of securities firms and investment banks, visit: </li></ul><ul><li>SEC:  w...
Global Issues <ul><li>Global nature of securities firms </li></ul><ul><li>Growth in securities trading and underwriting is...
Pertinent Websites <ul><li>Federal Reserve:  www.federalreserve.gov </li></ul><ul><li>NASD:  www.nasd.com </li></ul><ul><l...
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PPT1

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  1. 2. Overview <ul><li>In this segment ... Securities Firms and Investment Banks: </li></ul><ul><ul><li>Activities of securities firms and investment banks </li></ul></ul><ul><ul><li>Size, structure and composition </li></ul></ul><ul><ul><li>Balance sheets and recent trends </li></ul></ul><ul><ul><li>Regulation of securities firms and investment banks </li></ul></ul><ul><ul><li>Global issues </li></ul></ul>
  2. 3. Securities Firms &Investment Banks <ul><li>Nature of business: </li></ul><ul><ul><li>Underwrite securities. </li></ul></ul><ul><ul><li>Market making & Trading </li></ul></ul><ul><ul><li>Advising (example: M&A, restructurings). </li></ul></ul><ul><ul><li>Investment Management </li></ul></ul>
  3. 4. Securities Firms &Investment Banks <ul><li>Growth in domestic M&A: </li></ul><ul><ul><li>Less than $200 billion in 1990. </li></ul></ul><ul><ul><li>$1.83 trillion in 2000 </li></ul></ul><ul><ul><li>In US: bottomed out at $458 billion in 2002 ($1.2 trillion worldwide) </li></ul></ul><ul><ul><li>$1.3 trillion 2006 ($2.9 trillion worldwide) </li></ul></ul>
  4. 5. Mergers and acquisitions 1990-2006 2007 1.9 2008 1.3 6Mo 2009 http://www.thomsonreuters.com/business_units/financial/league_tables /
  5. 6. The Largest M&A Transactions
  6. 7. Size, Structure and Composition <ul><li>Dramatic increase in number of firms from 1980 to 1987. Decline of 37% following the 1987 crash, to year 2006. </li></ul><ul><li>1987: Salomon Brothers held $3.21 billion in capital. </li></ul><ul><li>2006: Merrill Lynch held capital of $35.5 billion. </li></ul><ul><li>Many recent inter-industry mergers (i.e., insurance companies and investment banks). </li></ul><ul><ul><li>Role of Financial Services Modernization Act, 1999 </li></ul></ul>
  7. 8. Types and Relative Sizes of Firms <ul><li>National full-line firms are largest. </li></ul><ul><ul><li>Merrill Lynch, Morgan Stanley </li></ul></ul><ul><li>National full-line firms specializing in corporate finance are second in size. </li></ul><ul><ul><li>Goldman Sachs, Salomon Brothers/Smith Barney </li></ul></ul><ul><li>Remainder of industry: </li></ul><ul><ul><li>Specialized investment subsidiaries of BHCs. </li></ul></ul><ul><ul><li>Discount brokers. </li></ul></ul><ul><ul><li>Regional securities firms (subdivided into large, medium and small). </li></ul></ul><ul><ul><li>Specialized electronic trading securities firms </li></ul></ul>
  8. 9. Top U.S.Underwriters, 2006
  9. 10. Key Activities <ul><li>Investing </li></ul><ul><li>Investment banking </li></ul><ul><ul><li>Activities related to underwriting and distributing new issues of debt and equity. </li></ul></ul><ul><li>Market making </li></ul><ul><ul><li>Increasing importance of online trading </li></ul></ul><ul><ul><ul><li>Technology risk </li></ul></ul></ul><ul><ul><li>Decimalization </li></ul></ul><ul><li>Trading </li></ul><ul><ul><li>Position trading, pure arbitrage, risk arbitrage, program trading </li></ul></ul>
  10. 12. Key Activities (continued) <ul><li>Cash management </li></ul><ul><li>Assisting with M&A </li></ul><ul><li>Back-office and service functions </li></ul><ul><ul><li>Prime brokerage (hedge funds) </li></ul></ul>
  11. 13. Trends <ul><li>Decline in trading volume and brokerage commissions </li></ul><ul><ul><li>particularly since crash of 1987, although some recovery since 1992. Record volumes 1995-2000. </li></ul></ul><ul><li>Declines in market values--and commission income 2001-2002 </li></ul><ul><li>Resurgence in market values and commissions during mid-2000s. </li></ul><ul><ul><li>But not the good old days </li></ul></ul>
  12. 14. Securities Firms Commission Income
  13. 15. Trends (continued) <ul><li>Pretax net income over $9 billion per year 1997-2000 </li></ul><ul><li>Pretax profits soared to $21.0 billion in 2000 </li></ul><ul><ul><li>curtailed by economic slowdown and September 11 attacks 2001. </li></ul></ul><ul><li>2003 record pre-tax profits of $24.1 billion. </li></ul>
  14. 16. Balance Sheet <ul><li>Key assets: </li></ul><ul><ul><li>Long positions in securities and commodities. </li></ul></ul><ul><ul><li>Reverse repurchase agreements. </li></ul></ul><ul><li>Key liabilities: </li></ul><ul><ul><li>Repurchase agreements major source of funds. </li></ul></ul><ul><ul><li>Securities and commodities sold short. </li></ul></ul><ul><ul><li>Broker call loans from banks </li></ul></ul><ul><li>Capital levels much lower than levels in banks </li></ul>
  15. 18. Regulation <ul><li>Primary regulator: SEC </li></ul><ul><ul><li>Reiterated by National Securities Markets Improvement Act (NSMIA) of 1996. </li></ul></ul><ul><ul><li>Prior to NSMIA, regulated by SEC and states. </li></ul></ul><ul><ul><li>Regulate trading activities such as shelf registration </li></ul></ul>
  16. 19. Regulation <ul><li>Early 2000s erosion of SEC dominance </li></ul><ul><ul><li>Increased vigilance by State Attorneys General </li></ul></ul><ul><ul><li>Spring 2003, $1.4 billion in penalties over investor abuses. </li></ul></ul><ul><li>Sarbanes-Oxley Act of 2002 </li></ul><ul><ul><li>Independent auditing oversight board under SEC </li></ul></ul><ul><ul><li>Instigated by Enron, Global Crossings, Tyco, WorldCom </li></ul></ul>
  17. 20. Regulation (continued) <ul><li>Day-to-day regulation: NYSE, NASD </li></ul><ul><li>October 2003 implementation of provisions of Patriot Act to combat money laundering </li></ul><ul><ul><li>Scrutiny of individual identities and affiliations with terrorists </li></ul></ul>
  18. 21. Investor Protection & Other Monitoring <ul><li>Securities Investors Protection Corporation (SIPC). </li></ul><ul><ul><li>Protection level of $500,000 </li></ul></ul><ul><li>Federal Reserve also has role in overseeing securities firms and investment banks </li></ul><ul><ul><li>Vulnerability of the financial system </li></ul></ul><ul><ul><li>Issue of timely settlement raised by Greenspan </li></ul></ul>
  19. 22. Stanford CD Fraud
  20. 23. Madoff Hedge Fund Fraud
  21. 24. Web Resources <ul><li>For details of regulation of securities firms and investment banks, visit: </li></ul><ul><li>SEC: www.sec.gov </li></ul><ul><li>NYSE: www.nyse.com </li></ul><ul><li>NASD: www.nasd.com </li></ul><ul><li>SIPC: www.sipc.org </li></ul>
  22. 25. Global Issues <ul><li>Global nature of securities firms </li></ul><ul><li>Growth in securities trading and underwriting is a global event </li></ul><ul><li>US accounting standards issues </li></ul><ul><li>Depreciation of the dollar against the yen and the euro </li></ul>
  23. 26. Pertinent Websites <ul><li>Federal Reserve: www.federalreserve.gov </li></ul><ul><li>NASD: www.nasd.com </li></ul><ul><li>NYSE: www.nyse.com </li></ul><ul><li>SEC: www.sec.gov </li></ul><ul><li>Securities Industry Association: www.sia.com </li></ul><ul><li>SIPC: www.sipc.org </li></ul><ul><li>The Banker : www.thebanker.com </li></ul><ul><li>Thompson Fin. Securities Data: www.thomson.com </li></ul><ul><li>Wall Street Journal www.wsj.com </li></ul>
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