Investment Banking - Financial Markets - Lecture Slides, Slides of Marketing

Download Investment Banking - Financial Markets - Lecture Slides and more Slides Marketing in PDF only on Docsity! Investment Banking and Secondary Markets 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 docsity.com Graham-Leach Act 1999 • President Clinton November 1999 signs Graham-Leach Bill which rescinded the Glass-Steagall Act of 1933.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(insurance) and Citicorp (commercial bank) 1998 to produce Citigroup, on anticipation that Glass-Steagall would be rescinded.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 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 The Underwriting Process I • Prefiling period • Advise issuers about their choices • Agreement among underwriters, designates manager, fees • Filing of registration statement with SEC, begins cooling-off period • Cooling off period – distribute preliminary prospectus (red herring), nothing else 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 Stabilization • A form of market manipulation by the underwriter near the time of the issue that is permitted by the SEC • Underwriting syndicate legally allowed to conspire to “fix” prices in market until entire issue is sold out docsity.com Variations on the Usual Underwriting Process • Auction Process (competitive bidding underwriting) various syndicates bid on the issue • Preemptive rights offering: existing shareholders have rights to buy issue below market value • Directly Public Offering (DPO): Company itself sells its securities directly to public, usually over the web. Small firms. Example: Internet Ventures, a web service provider, raised $3.8 million in 1998 by advertising the securities to its customers on the web. docsity.com Private Placement • Sold only to “sophisticated” investors, exempt from SEC registration. • Regulation D: Private issues cannot be advertised, defines sophisticated investors • SEC has provided that privately placed securities cannot be sold for two years after purchase. • SEC Rule 144a April 1990 eliminates two-year holding period for institutions with over $100 million in the security docsity.com Initial Public Offerings • Price tends to jump up immediately after an IPO is issued. • Apparently leave money upon the table docsity.com Survey of IPO Investors • “Do you think that investors expect reputable underwriters to take some account of true investment value in deciding the offering price in an IPO, rather than just the price the market will bear on the day of the offering?” 84% agree docsity.com Survey of IPO Investors • Have you done any calculations of what the true fundamental value of a share in the company was, and compared the price of a share with this value? – 80% no. docsity.com