Download Investment Banking - Banking - Lecture Slides and more Slides Banking and Finance in PDF only on Docsity! Lecture 17: Investment Banking and Secondary Markets Economics Docsity.com Glass-Steagall Act 1933 • The modern concept of “Investment Bank” was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. • Carter Glass, Senator from Virginia, believed that commercial banks securities operations had contributed to the crash of 1929, that banks failed because of their securities operations, and that commercial banks used their knowledge as lenders to do insider trading of securities. Docsity.com Investment Banks • Bulge bracket firms: First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Brothers, Lehman Brothers. • Traditionally were often partnerships, but partnership form is disappearing. Docsity.com Graham-Leach Act 1999 • President Clinton November 1999 signs Graham-Leach Bill which rescinded the Glass-Steagall Act of 1933. • Consumer groups fought repeal of Glass- Steagall saying it would reduce privacy. Graham-Leach calls for a study of the issues of financial privacy Docsity.com Mergers among Commercial Banks, Investment Banks & Insurance Companies • Travelers’ Group (insurance) and Citicorp (commercial bank) 1998 to produce Citigroup, on anticipation that Glass-Steagall would be rescinded. Brokerage Smith Barney • Chase Manhattan Bank (commercial bank) acquires JP Morgan (investment bank) (2000) for $34.5 billion • UBS Switzerland buys Paine Webber (brokerage) 2000 • Credit Suisse buys Donaldson Lufkin Jenrette (investment bank) 2000 Docsity.com UBS AG • Union Bank of Switzerland founded in 1912 by merger of Bank in Winterthur (1862) and Toggenburger Bank (1863) • Merged with Swiss Bank Corp 1998, Paine Webber 2000 • April 1, 2008, announced it had already written down $18 billion in bad investments and expects to write down another $19 billion • Said it would raise $15 billion in new capital from shareholders Docsity.com Underwriting of Securities • Issuance of shares and corporate debt • Seasoned issue versus IPO • Underwriter provides advice for issuer, distribution of securities, sharing of risks of issue, and stabilization of aftermarket. • Underwriter also “certifies” the issue by putting its reputation behind the issue. Docsity.com Moral Hazard Problem Mitigated by Investment Banks • Firms have incentive to issue shares when they know their earnings are only temporarily high. • This problem can be “solved” by resorting to bank loans instead of new equity • Problem can also be solved by issuing security with an investment bank that has a reputation to protect. • Studies show that investment banks that repeatedly underprice or overprice issues suffer a market share loss afterwards. Docsity.com The Underwriting Process II • Call prospective clients for indication of interest • Due diligence meeting between underwriter and corporation • Decide on offering price, • underwriting agreement, which underwriter sells what • Dealer agreement, dealers purchase from underwriters at a discount from public price • Effective date • Support the price in the aftermarket Docsity.com Tombstone
$100,000,000
GEORGIA aS
POWER
A SOUTHERN COMPANY
Series H 6.70% Senior Insured Quarterly Notes
due March 1, 2011 (1Q Notes™’)
Insured by Ambac
Edward D. Jones & Co.. L.P.
A.G. Edwards & Sons, Inc.
Prudential Securities
Docsity.com
Initial Public Offerings • Price tends to jump up immediately after an IPO is issued. • Apparently “leave money upon the table” • “Impressario hypothesis” explains why they do this. Docsity.com
