Introduction and history Flashcards
What are core IB activities?
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
What are types of IBs?
1) Financial Holding Companies
2) Full-service IBs
3) Boutique IBs
What are financial holding companies?
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
What are full-service IBs?
IBs engaging many activities including underwriting, trading, mergers, investment management, …
Examples:
1) Goldman Sachs
2) Morgan Stanley
What are boutique IBs?
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)
How are IBs distributed worldwide?
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
What is the IB situation in UK?
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
What were IBs first called in UK
“Merchant banks” middle ages until 19th century for spices, silk, metals, (grain and cloth)
When did the modern form of underwriting start?
19th century saw an increase in banking partnerships such as Rothschilds, Barings and Browns. Also start underwriting and selling gov bonds.
When did MS and JPM start?
1800s and dramatic expansion 19th&20th century “golden age” –> excessive speculation
How did the Great Depression (Market Crash 1929) impact IBs?
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
When was the “Second Golden Age”?
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.
When was the Glass-Steagall Act repealed and what was its impact?
- Factor in financial crisis 2007/2008. Led to bloated financial institutions like Bear Stearns, heavily invested in mortgage backed securities.
What were the key causes of the financial crisis?
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
What were the consequences of the financial crisis for IBs?
-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
What regulations followed from FC?
- 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)
What was the glass-steagall act 1933?
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)
When did IBs become public companies?
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
What was the Gramm-Leach-Bliley Act 1999?
“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
What was the Sarbanes-Oxley Act 2002?
-“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
What was Global Analyst Research Settlement (2003)?
settlement between SEC, NYSE, NASDAQ and 10 major IBs and some analysts.
- conflict of interest recommendations
What were the requirements of GARS (2003)?
1) Better governance and seperation: equity research and corp. finance departments.
2) Enforced firewalls
3) Research analysts restricted from IPO pitches and roadshows.
What was the Dodd-Frank Wall Street Reform Act 2010?
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.
What was the Volker Rule (2015)?
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.
What was the “big bang”?
27th October 1986.
Deregulation of UK banking rules that changed “close-shop” mentality.
UK banks lost MS, clients, staff
What was the independent commission on banking (2010)?
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
Timeline of US Regulation
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
Timeline of UK regulation
Pre-1980s: “Merchant Banks”
1986: Big Bang
2010: Independent Commission on banking
2011: Vickers report
2013: Financial Services (Banking Reform) Act
What was the Vickers Report (2011)?
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
