Chapter 1 Investment Banking Activities 1 A Investment

Chapter 1 Investment Banking Activities 1

A. Investment Banking Activities Investment Bank Revenue-Generating Activities Support Activities Primary market making • Corporate finance • Municipal finance • Treasury and agency finance Clearing Secondary market making • Dealer Activity • Brokerage activities Research Trading • Speculation • Arbitrage Corporate Restructuring • Expansion • Contraction • Ownership and control Financial engineering • Zero coupon securities • Mortgage-backed securities • Asset-backed securities • Derivative products Other revenue-generating activities • Advisory services • Investment Management • Merchant banking • Venture capital • Consulting Internal finance(funding) Information services 2

B. Investment Banking v. s. Commercial Banking n n The Glass-Steagall Act, 1933 Gramm-Leach-Bliley Act, 1999 n n Banking Securities Insurance Fed funds market vs. Repo market 3

C. Investment Bankers n Oligopoly n U. S. Firms Merrill Lynch, Pierce, Fenner & Smith Inc. (Bank of America) n Citigroup Salomon Smith Barney(SSB) Inc. n Lehman Brothers. (Chapter 11) n Goldman Sachs & Co. n Morgan Stanley Dean Witter. n 4

C. Investment Bankers n Oligopoly n Euro Firms n n n UBS Warburg Credit Swissie Deutsche Bank Abn Amro (RBS) Barclays 5

C. Investment Bankers n Oligopoly n Local Firms n n n China Development Industrial Bank Taiwan Industrial Bank Securities Firms 6

D. Types of Market Making n n n Brokered Trading Dealer Trading Market Making 7

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E. Market Making by Underwriting Equity financing vs. Debt financing Equity Financing a. n n n Venture Capital(VC) Initial Public Offering(IPO) Seasoned Equity Offering(SEO) Deposit Receipt(DR) Debt Finance n n n Mezzanine Finance Convertible bonds Government bonds Eurodollar bonds Junk bonds 11

E. Market Making by Underwriting Public offerings vs. Private placement b. n n Public Offerings Private placement Initial Public Offerings vs. Seansoned Public Offerings c. n n IPOs Seasoned Public Offerings 12

F. Market Making by Financial Innovation * Conversion arbitrage : The investment bank takes one (or more) financial instruments and, through a process of composition or decomposition, creates one (or more) very different financial instruments. 13

F. Market Making by Financial Innovation a. Mortgage Pass-through Mortgage-backed securities: a single-class whole mortgage is used to create multi-class mortgage-back securities call collateralized mortgage obligations. * GNMA collateralized Bonds * Collateralized Mortgage obligations of FHLMC * GNMA-type CMOs issued by subsidiaries of investment bankers, mortgage bankers and home builders 14

F. Market Making by Financial Innovation Demand side: 1. For short term issues § § Thrifts Commercial-bank portfolios Money-market funds Corporate treasurers For intermediate term and longer term issues 2. • • • Insurance companies Pension funds Bank trust departments Investment advisors International investors 15

F. Market Making by Financial Innovation b. Zero coupon bonds a single-class conventional bond is used to create a strip of individual zero coupon bonds 16

Interest rate swaps c. n n Fixed-rate payer (S&L) has sold a hypothetical fixed rate security to the floating rate payer (the bank) Floating rate payer (bank) has sold a hypothetical floating rate note to the fixe rate payer (the S&L) 17

G. Market Making by Corporate Restructuring Expansion a. n n n Mergers : horizontal, vertical, conglomerate Tender offer Joint ventures Sell offs b. n n Spin offs Divestitures 18

G. Market Making by Corporate Restructuring Corporate control c. n n Premium buybacks Anti-takeover amendments Changes in ownership structure b. n n Exchange offers Share repurchases Going private Leverage Buy out (LBO) 19