1. Irwin/McGraw-Hill 1 Securities Firms and Investment Banks Chapter 3 Financial Institutions Management, 3/e By Anthony Saunders

2. Irwin/McGraw-Hill 2 Securities Firms and Investment Banks n Nature of business: Underwrite securities Market making Advising (example: M&A, restructurings) n Growth in mergers and acquisitions: $200 billion in 1990. $919 billion 1997. $910 billion in first half of 1998.

3. Irwin/McGraw-Hill 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. Irwin/McGraw-Hill 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. Irwin/McGraw-Hill 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. Irwin/McGraw-Hill 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. Irwin/McGraw-Hill 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. Irwin/McGraw-Hill 8 Regulation n Primary regulator: SEC Reiterated by National Securities Markets Improvement Act (NSMIA) of 1996. Prior to NSMIA, regulated by SEC and states. n Day-to-day trading practices regulated by the NYSE and NASD. n Securities Investors Protection Corporation (SIPC).