Introduction

Question 1

Security Underwriting

Answer 1

A process by which investment banks raise investment capital from INVESTORS on behalf of corporations and governments that are issuing securities (both equity and debt capital).

Question 2

Investment bank served as a bridge/middleman between…?

Answer 2

People who have capital and want to invest it &

People who need financing for their projects.

Question 3

Why reputation matters in their jobs?

Answer 3

Investment banks work with top tier investors
➡️ Higher reputation
➡️ All issuers want to work with middlemen because they could contact top tier investors.

Question 4

Commercial bank

Answer 4

Provide loans to the public.

Collect savings/deposit ➡️ Lend the money to borrowers

Question 5

Spread

Answer 5

Interest pay to depositors ➖ Interest charge borrowers

Question 6

Difference between Investment Bank and Commercial Bank

Answer 6

1️⃣ No cheap financing (client deposits)

2️⃣ Investment Banks work on large scale and sophisticated transactions.

Question 7

Universal banks

Answer 7

Commercial ➕ Investment banking services

Question 8

Advantage of universal banks

Answer 8

1️⃣ Sell more products to the same client
2️⃣ One stop shop
3️⃣ Advisors for all situations (regular business & when the company raise equity/debt)
4️⃣ Understand the business (close relationship with the firm)

Question 9

Disadvantage of universal banks

Answer 9

Dangerous. Universal banks have more information about their clients and clients are also BORROWERS.

1️⃣ May sell low quality securities that they are underwriting to the <b>public/depositors</b>

2️⃣ May resell low quality securities that they are underwriting to <b>Investors</b>

3️⃣ Corporate can be both Borrower and Issuer. Bank may <b>force</b> the corporate to use their securities underwriting services. If not, charge borrower <b>higher interest rate</b>.

4️⃣ As corporate can be borrower and issuer, bank may provide troubled corporate securities underwriting service and issue securities in order to repay the loans. <b>Transfer the bankruptcy risk to the public</b>. Prevent them from losing their own money.

Question 10

The Glass Steagall Act (1933)

Answer 10

It prohibited commercial banks engagement in investment banking services.

1999, this act was repealed 废除. Allowing banks to sell commercial and investment banking services under the same roof.

It protected securities firms from competing with much bigger commercial banks AS commercial banks access to retail deposits.

Question 11

Example of Global Financial Conglomerates

Answer 11

HSBC, JP Morgan, Bank of America, Deutsche Bank

Question 12

Example of Pure Investment Banks

Answer 12

Goldman Sachs, Morgan Stanley

Question 13

Advantage of Pure Investment Bank

Answer 13

1️⃣ Specialization
2️⃣ Niche
3️⃣ Reputation

<b><i>#1 Most Valuable asset</i></b>: <b>🌟 Long-lasting client relationships</b>

Question 14

Example of conflict of interest

Answer 14

Trading and Brokerage:
Proprietary - buying a company’s shares with the bank’s money
Brokerage - buying a company’s shares with the clients’ money

If the market crashes, which are the securities that will be taken care first?

Also, it is possible that the opinion of a bank’s researcher would be influenced by the bank underwriting that given company’s securities.

Question 15

Research departments

Answer 15

Examine stocks and provide recommendations

Question 16

Chinese Walls

Answer 16

Create a <b>barrier between different divisions</b> whose interaction could cause a conflict of interest.

<b>Client information is confidential</b>. Cannot be shared with the people from the same firm who don’t have an authorised access to it.

Question 17

Role of Investment Banker

Answer 17

Be the <b>TRUSTED</b> advisers of their client