Asset and Liability Management
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SecuritiesBrokers.pptxAsset and Liability Management
Fin6102
Ferriter – Spring 2018
Overview
This chapter discusses securities brokerage firms and investment banks
Activities of securities firms and investment banks
Size, structure, and composition
Balance sheets and recent trends
Regulation of securities firms and investment banks
Global issues
Ch 4-2
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Securities Firms and Investment Banks
Securities firms
Specialize in the purchase, sale, and brokerage of existing securities
Retail
Investment banks
Specialize in originating, underwriting and distributing issues of new securities
Advising on M&As and restructuring
Commercial
Ch 4-3
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Securities Firms and Investment Banks Continued
Growth in domestic M&A:
Less than $200 billion in 1990
$1.83 trillion in 2000
In US: bottomed out at $458 billion in 2002 ($1.2 trillion worldwide)
Topped $1.7 trillion 2007 ($4.5 trillion worldwide)
Effects of financial crisis: fell to $687 billion in 2010 ($1.8 trillion worldwide)
Worst financial crisis since 1930s, but M&A activity still greater than early 2000s
Ch 4-4
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Ch 4-5
Mergers and Acquisitions, 1990-2015
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Structural Changes in Recent Years
Acquisition of Bear Stearns by J.P. Morgan Chase
Bankruptcy of Lehman Brothers
Acquisition of Merrill Lynch by Bank of America
Only two remaining major firms:
Goldman Sachs and Morgan Stanley
Converted to commercial bank holding companies in 2008
Ch 4-6
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Largest M&A Transactions
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Size, Structure and Composition
Dramatic increase in number of firms from 1980 to 1987
Decline of 37% in the number of firms following the 1987 crash, to year 2006
Concentration of business among the largest firms
Ch 4-8
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Size, Structure and Composition Continued
Many recent interindustry mergers (i.e., insurance companies and investment banks)
Role of Financial Services Modernization Act, 1999
Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley gone by end of 2008
Ch 4-9
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Types and Relative Sizes of Firms
National full-line firms are largest
Service retail and corporate clients
Three categories: commercial bank holding companies, national full-line firms, and large investment banks
BOA (via acquisition of Merrill Lynch); Morgan Stanley
National full-line firms specializing in corporate finance are second in size
Goldman Sachs, Salomon Brothers/Smith Barney (Citigroup)
Ch 4-10
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Remainder of industry:
Regional securities firms (subdivided into large, medium, and small)
Specialized discount brokers
Electronic trading firms
Venture capital firms
Other firms
E.g., research boutiques, floor specialists, etc.
Ch 4-11
Types and Relative Sizes of Firms Continued
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Ch 4-12
Top BHCs, 2014 (by brokerage fee income)
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Key Activities
Investment banking
Activities related to underwriting and distributing new (IPOs) and secondary (seasoned) issues of debt and equity
Public and private offerings
Venture Capital
Market making
Involves creating a secondary market
Increasing importance of online trading
Technology risk
Ch 4-13
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Key Activities (Continued)
Trading
Position trading, pure arbitrage, risk arbitrage, program trading, etc.
Investing
Cash management
Mergers and Acquisitions (M&As)
Back-office and service functions
Ch 4-14
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Recent Trends
Decline in trading volume and brokerage commissions
Particularly since crash of 1987, although some recovery since 1992
Record volumes 1995-2000
Resurgence in market values and commissions during mid-2000s
New market value lows in 2008-2009
Commission income also declined
Ch 4-15
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Recent Trends (Continued)
Pretax net income over $9 billion per year between 1996 and 2000
Pretax profits soared to $31.6 billion in 2000
Curtailed by economic slowdown and September 11, 2001 terrorist attacks
Worries over securities law violations and loss of investor confidence
E.g., Enron, Merck, WorldCom, etc.
Financial crisis, 2008
Profits recovered, 2009
Ch 4-16
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Ch 4-17
Securities Industry Pretax Profits, 1990-2014
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Balance Sheet
Key assets:
Reverse repurchase agreements
Receivables from other broker-dealers
Long positions in securities and commodities
Subject to high levels of market and interest rate risk
Ch 4-18
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Balance Sheet Continued
Key liabilities:
Repurchase agreements are major source of funds
Payables to customers
Payables to other broker-dealers
Securities and commodities sold short
Capital levels much lower than in depository institutions
Ch 4-19
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Regulation
Primary regulator is the Securities and Exchange Commission (SEC)
Reaffirmed by National Securities Markets Improvement Act (NSMIA) of 1996
Prior to NSMIA, regulated by SEC and each state in which the firm operated
Ch 4-20
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Regulation Continued
Early 2000s saw erosion of SEC dominance
Increased vigilance by state attorney generals
Criminal cases brought mainly by states against securities law violators
New York State vs. Merrill Lynch
Spring 2003, $1.4 billion in penalties over investor abuses
New rules brought by SEC for greater disclosure by analysts of potential conflicts of interest
Ch 4-21
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Regulation Concluded
Financial Industry Regulatory Authority (FINRA)
Handles day-to-day regulation
Independent, not-for-profit
Authorized by Congress
Writes and enforces rules governing security firm activities
Enhance transparency in the market
Dark pools
Ch 4-22
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Extension of Oversight
Additional oversight from US Congress
Hearings focused on role of investment banks in the financial crisis
Goldman Sachs bundling of toxic assets
Ch 4-23
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Extension of Oversight Continued
2010 Wall Street Reform and Consumer Protection Act
Financial Services Oversight Council
New authority for Federal Reserve to supervise systemically important firms
Registration limits for advisors changed
Regulation of securitization markets; stronger regulation of credit agencies
Authority for government to resolve nonbank FIs
Ch 4-24
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Extension of Oversight Concluded
Kenneth Feinberg (“pay czar”) given voice as to executive compensation packages
Ch 4-25
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Investor Protection and Other Monitoring
Securities Investor Protection Corporation (SIPC)
Protection level of $500,000
October 2003 implementation of provisions of Patriot Act to combat money laundering
Scrutiny of individual identities and affiliations with terrorists
Ch 4-26
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Global Issues
Global nature of securities firms
Competition between US and European firms
Foreign investors’ transactions in US securities and US investors’ transactions in foreign securities exchanges increased
Global concern about capital, liquidity, and leverage following the financial crisis
Implications for global competitiveness
Strategic alliances
Exit from foreign markets
Ch 4-27
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Pertinent Websites
Federal Reserve
NYSE
SEC
Securities Industry Association
SIPC
FINRA
Ch 4-28
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