Introduction and history

Question 1

What are core IB activities?

Answer 1

A) Advisory services:
1) M&A
2) Asset restructuring
3) Debt restructuring
4) Financial Re-engineering
B) Underwriting services:
1) Asset management
2) Proprietary trading and brokerage
3) Research

Question 2

What are types of IBs?

Answer 2

1) Financial Holding Companies
2) Full-service IBs
3) Boutique IBs

Question 3

What are financial holding companies?

Answer 3

Large banking groups also offer IB services.
Examples:
1) HSBC
2) Deutsche Bank
3) UBS
4) Citigroup
5) JP Morgan Chase
6) Bank of America

Question 4

What are full-service IBs?

Answer 4

IBs engaging many activities including underwriting, trading, mergers, investment management, …
Examples:
1) Goldman Sachs
2) Morgan Stanley

Question 5

What are boutique IBs?

Answer 5

IBs that don’t offer many services but specialise in particular areas. They are not part of financial institutions.
Examples:
1) Greenhill (M&A and restructuring)
2) Lazard (Asset management)
3) Rothschild & Sons (M&A, advisory)

Question 6

How are IBs distributed worldwide?

Answer 6

1) America: GS, JPMC, MS, BoAML
2) German and Swiss: CS, UBS, DB, CB
3) UK and France: HSBC, Barclays, BNP, SG
4) China and Japan: ICBC, CCB, Nomura, BTM

Question 7

What is the IB situation in UK?

Answer 7

Dominated by US, Swiss and German banks.
Examples IPO UWs
Merlin Entertainment (£1.2bn, mc £4.8bn): GS, DB & JPMC
Glencore(£11bn, mc £64bn): Citi, CS, MS

Question 8

What were IBs first called in UK

Answer 8

“Merchant banks” middle ages until 19th century for spices, silk, metals, (grain and cloth)

Question 9

When did the modern form of underwriting start?

Answer 9

19th century saw an increase in banking partnerships such as Rothschilds, Barings and Browns. Also start underwriting and selling gov bonds.

Question 10

When did MS and JPM start?

Answer 10

1800s and dramatic expansion 19th&20th century “golden age” –> excessive speculation

Question 11

How did the Great Depression (Market Crash 1929) impact IBs?

Answer 11

IBs forced to merge to survive. More stringent regulation.
Glass Steagall Act 1933: separation CBs and IBs.
Creation of Morgan Stanley as spinoff from JP Morgan

Question 12

When was the “Second Golden Age”?

Answer 12

1980s. Shift of focus from deal making to trading. Resulted from advancements in technology and computer programming (dotcom boom and bubble).
Algorithms for trading strategies.

Question 13

When was the Glass-Steagall Act repealed and what was its impact?

Answer 13

1999. Factor in financial crisis 2007/2008. Led to bloated financial institutions like Bear Stearns, heavily invested in mortgage backed securities.

Question 14

What were the key causes of the financial crisis?

Answer 14

1) Predatory lending targeting low-income homebuyers
2) Excessive risk-taking by financial institutions
3) US housing bubble bust
4) avoidable: human (in)action of ignoring warnings
5) Failures in financial regulation and supervision
6) Dramatic failures of corporate governance and risk management
7) Combination of excessive borrowing, risky investments and lack of transparency
8) Unprepared Gov
9) Systematic breakdown in accountability and ethics
10) Collapsing mortgage-lending standards
11) OTC derivatives (2000 legislation to ban regulation by FED)
12) Failures of credit-rating agencies
summary: speculative bubble in housing prices and overreliance on sub-prime mortgages

Question 15

What were the consequences of the financial crisis for IBs?

Answer 15

-Collapse of Bear Stearns (acquired by JP Morgan Chase), Merrill Lynch (acquired by BoA) and Lehman Brothers
-Weakened wall street dominance
- Rise of new financial centers like HK and Singapore
- More stringent regulations
-loss $6tn to govs: taxpayers
- value destroyed in stock markets: $19tr
- >9m job loss US
- 3.7m job loss UK (1/7)
- 1m job loss banks US and UK

Question 16

What regulations followed from FC?

Answer 16

• US: Dodd-Frank Wall Street Reform Act (2010), volcker rule (2015)
• UK: Independent commission on banking (2010), vickers report (2011), financial services (banking) reform act (2013)

Question 17

What was the glass-steagall act 1933?

Answer 17

Restore confidence in banking system:
- restricted use of banking credit for speculation and investment in stock market
- “industry, commerce and agriculture”
- no “cross-directorships” between IB and CB
- banks had to choose between being CB or IB
- Federal reserve more authorative power in regualting US bank activity (SEC 1934)

Question 18

When did IBs become public companies?

Answer 18

1970s.
Previously they were liable to debt & SE margin calls. Limited liability structures prohibited by law.
Partners usually family members or ties (5-8).
Impact: restricted capital bases (no room for growth).
Last GS 1999

Question 19

What was the Gramm-Leach-Bliley Act 1999?

Answer 19

“Financial services Modernisation Act”
- further repeated GS act
main outcome: CBs, IBs, securities firms and insurance companies allowed to consolidate and form FINANCIAL HOLDING COMPANIES
–> heightened competition and US dominance fin institutions
Citigroup formed (Citibank, Travelers group, SSSB)
PROBLEM: less control SEC

Question 20

What was the Sarbanes-Oxley Act 2002?

Answer 20

-“Public company accounting reform and investor protection act”
-after # accounting schandals such as Enron, Worldcom and Tyco.
-Made BoDs more accountable.
-Auditors more onus (seperate from accountants)
-More financial disclosure requirements.
- pressure on analysts: conflict of interest

Question 21

What was Global Analyst Research Settlement (2003)?

Answer 21

settlement between SEC, NYSE, NASDAQ and 10 major IBs and some analysts.
- conflict of interest recommendations

Question 22

What were the requirements of GARS (2003)?

Answer 22

1) Better governance and seperation: equity research and corp. finance departments.
2) Enforced firewalls
3) Research analysts restricted from IPO pitches and roadshows.

Question 23

What was the Dodd-Frank Wall Street Reform Act 2010?

Answer 23

changed ways banks were run.
aims:
1) stop another financial crisis
2) stop “too big to fail” mentality
3) curtailed “risk-taking” mentality
4) create financial stability for banking industry by creating a new regulator for mortgage companies
- protect from excessive lending for low-cost housing
5) protect consumers and the taxpayers: offset need to inject $bn into banking system through issuance of gov debt.

Question 24

What was the Volker Rule (2015)?

Answer 24

Restricts IBs from proprietary trading.
exceptions:
1) US gov, state & municipial obligations
2) anything connected with underwriting or market-making
3) anything connect with risk-mitigating (hedging) activities
4) any security or instrument on behalf of customers
Subject to:
a) bank owning <3% of fund
b) overall limit of 3% of entity’s tier1 capital invested in private funds.

Question 25

What was the “big bang”?

Answer 25

27th October 1986.
Deregulation of UK banking rules that changed “close-shop” mentality.
UK banks lost MS, clients, staff

Question 26

What was the independent commission on banking (2010)?

Answer 26

UK response to FC.
similar to DF act US.
Focus:
1) ringfence investment banking activities
2) Seperate commercial banking arms (preventing gov bail out)
3) IBs have own balance sheets and allowed to fail.
4) Restricting leveraging & exposure to volatile markets (min equity =10% tier1, more stringent capital adequacy directives)
- 2013 with Fin.Ser.Ref.Act

Question 27

Timeline of US Regulation

Answer 27

1929: Market crash &GD
1933: GS Act
1970s: IBs public
1999: Gramm-Leach-Bliley
2002: Sarbanes-Oxley Act
2003: Global analyst research settlement
2007/8: Financial Crisis
2010: DF WS Reform Act
2015: Volcker Rule
2020: Covid-19

Question 28

Timeline of UK regulation

Answer 28

Pre-1980s: “Merchant Banks”
1986: Big Bang
2010: Independent Commission on banking
2011: Vickers report
2013: Financial Services (Banking Reform) Act

Question 29

What was the Vickers Report (2011)?

Answer 29

investigate the stability and competition of UK banks.
Measures:
1) seperate retail from IB
2) increase competition: make easier to switch banks
3) strengthening regulation