1. The Financial Services Industry: Securities Firms and Investment Banks
Chapter 4
The Financial Services Industry: Securities Firms and Investment Banks

2. 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

3. Securities Firms and Investment Banks
Nature of business:
Underwrite securities.
Market making.
Advising (example: M&A, restructurings).
Growth in mergers and acquisitions:
Less than $200 billion in 1990.
$1.83 trillion in 2000
Decline in 2001

4. The Largest M&A Transactions

5. Size, Structure and Composition
Dramatic increase in number of firms from 1980 to Decline of 24% following the 1987 crash, to 2000.
1987: Salomon Brothers held $3.21 billion in capital.
2000: Merrill Lynch held capital of $19.3 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.
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).
Specialized electronic trading securities firms

7. Top U.S.Underwriters, 2000

8. Key Activities Investing Investment banking Market making Trading
Activities related to underwriting and distributing new issues of debt and equity.
Market making
Trading
Position trading, pure arbitrage, risk arbitrage, program trading

9. Key Activities (continued)
Cash management
Assisting with mergers and acquisitions
Back-office and service functions.

10. Trends Decline in trading volume and brokerage commissions
particularly since crash of 1987, although some recovery since Record volumes
Decline in underwriting activities over
Resurgence in activity and profitability

11. Trends (continued) Increases in holdings of fixed-income trading
greater interest rate and sovereign risk exposure
Pretax profits soared to $21.0 billion in 2000
curtailed by economic slowdown and September 11 attacks
1987: Federal Reserve allowed BHCs to expand securities underwriting.
Prohibited since 1933 under Glass-Steagall Act.

12. Balance Sheet Key assets: Key liabilities:
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
Day-to-day trading practices regulated by the NYSE and NASD.

14. 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

15. Web Resources
For details of regulation of securities firms and investment banks, visit:
SEC:
NYSE:
NASD:
SIPC:
Web Surf

16. Global Issues
Growth in securities trading and underwriting is a global event
Other countries were not encumbered by regulations such as Glass-Steagall Act
Foreign banks operating in the U.S. compete with U.S. commercial and investment banks

17. Pertinent Websites Federal Reserve: www.federalreserve.gov
NASD:
NYSE:
SEC:
Securities Industry Association:
SIPC:
The Banker:
Thompson Fin. Securities Data:
Web Surf